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Optimal growth through innovation, investment, and labor

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  • Wan, Jing
  • Zhang, Jie

Abstract

We investigate optimal growth in an endogenous growth model with leisure, investment, and capital-based innovation for new intermediates under monopolistic competition. We find a unique optimal path that converges monotonically to balanced growth in finite periods in contrast to indefinite fluctuations on the market-equilibrium path. The market equilibrium yields higher levels of intermediates but lower levels of labor, investment, innovation, and growth than their optimal levels. Appropriate taxes and subsidies can eliminate the inefficiencies and fluctuations to obtain optimal growth. Quantitatively, the welfare gain of optimal taxes and subsidies exceeds a 20% increase in consumption from the US tax system.

Suggested Citation

  • Wan, Jing & Zhang, Jie, 2021. "Optimal growth through innovation, investment, and labor," European Economic Review, Elsevier, vol. 132(C).
    • Handle: RePEc:eee:eecrev:v:132:y:2021:i:c:s0014292120302749
    DOI: 10.1016/j.euroecorev.2020.103644
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    Cited by:

    1. Jing Wan & Jie Zhang, 2023. "R&D subsidies, income taxes, and growth through cycles," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 76(3), pages 827-866, October.

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    More about this item

    Keywords

    Taxes; Subsidies; Innovation; Investment; Cycle;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • D6 - Microeconomics - - Welfare Economics
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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