Reexamining the Interaction between Innovation and Capital Accumulation

In endogenous growth models with innovation and capital accumulation, Arnold (1998) and Blackburn, Hung and Pozzolo (2000) show that long-run growth of per capita income is independent of innovation activities; it is solely determined by preferences and the human capital accumulation technology. As a result, government policies do not affect long-run growth. This paper develops an endogenous growth model with innovation and (physical and human) capital accumulation to show that long-run growth depends on both innovation and capital accumulation technologies as well as on preferences and that government taxes and subsidies can have effects on the long-run growth rate.