TITLE:
Not Enough R&D? Or Maybe Too Much? Intensity of Knowledge Spillovers and Optimal R&D Policy in Schumpeterian Growth Theory
AUTHORS:
Elie Gray
KEYWORDS:
Schumpeterian growth theory; Pareto sub-optimality; Market incompleteness; Knowledge spillovers; R&D incentives; Optimal policy tools
JOURNAL NAME:
Theoretical Economics Letters,
Vol.12 No.6,
November
9,
2022
ABSTRACT: This paper presents an endogenous growth model à la Aghion
& Howitt (1992) in which we explicitly formalize knowledge spillovers in
the innovation process. We revisit the issue of the Pareto non-optimality of
the Schumpeterian equilibrium by revealing the part played by the intensity of
knowledge spillovers. Basically, we highlight that the market incompleteness
characterizing this type of decentralized economy (knowledge is not priced) is
all the more likely to lead to an under-optimal (resp. over-optimal) R&D
effort as the intensity of knowledge spillovers is high (resp. low). The reason
behind this is that the effects of the distortion of R&D incentives
resulting from market incompleteness are amplified all the more as this intensity
is strong. Complementarily, we derive the optimal tool dedicated to correct the
market failure caused by market incompleteness, and we demonstrate that it
clearly depends on the intensity of knowledge spillovers: the higher (resp.
lower) the intensity of knowledge spillovers is, the more likely this policy
tool should consist in a subsidy (resp. tax). Moreover, if this optimal tool
happens to be a subsidy, then this subsidy will be all the larger as the
intensity is high.