Seminar Directed R&D Subsidies

Abstract

Should R&D subsidies be targeted towards certain types of technologies? We build and calibrate a directed technical change growth model with both capitaland labor-augmenting technological change along the balanced growth path, circumventing the restrictions usually posed by the Uzawa steady-state theorem. We use the model to study how directed R&D policy affects economic growth and the labor share of income. For a given level of expenditure, capital-augmenting R&D subsidies boost to economic growth more than labor-augmenting R&D subsidies.
When the elasticity of substitution between capital and labor is less than one, capital-(labor-) augmenting subsidies also increase (decrease) the labor share factors of income. Uniform subsidies are an intermediate case for growth and are not distributionally neutral. The lifetime utility of the representative household is maximized when the effective subsidy rate is three times higher for capital-augmenting R&D.
Benefits from capital-augmenting R&D accrue slowly, requiring sustained policy commitment.