The Effects of Subsidies in a Research-Driven Endogenous Growth Model

This paper focuses on the allocation and growth effects of different types of subsidies aimed at rectifying the two distortions that occur in research-driven growth models of the Romer (1990) type. These distortions lead to a suboptimal growth rate and are caused by the monopolistic structure of the capital goods market and the public good character of knowledge which is created as a by-product of R&D and induces positive intertemporal externalities. We show that the effects depend heavily on the design of the subsidies, implying different policy mix possibilities to achieve the optimal output level and growth rate.