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R&D policy and competition in a Schumpeterian growth model with heterogeneous firms

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  • Carmelo P Parello

Abstract

This paper presents a second-generation Schumpeterian growth model to investigate the existence of possible links between firms’ size, competition stiffness and the effectiveness of R&D policy. In the model, the step size of innovation is randomly drawn from a Pareto distribution, and firms are heterogeneous in terms of market power. The paper finds that the optimal R&D policy is to subsidize R&D and not to tax it, and that more intense competition enlarges the gap between free-market R&D investment and the optimal outcome. However, the paper also finds that the short-run impact on welfare of R&D policy is always negative, and that the recovery time of the welfare loss as a result of the subsidy is negatively related to firms’ market power.

Suggested Citation

  • Carmelo P Parello, 2019. "R&D policy and competition in a Schumpeterian growth model with heterogeneous firms," Oxford Economic Papers, Oxford University Press, vol. 71(1), pages 187-202.
    • Handle: RePEc:oup:oxecpp:v:71:y:2019:i:1:p:187-202.
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    File URL: http://hdl.handle.net/10.1093/oep/gpy018
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    Cited by:

    1. Ohki, Kazuyoshi, 2023. "Disruptive innovation by heterogeneous incumbents and economic growth: When do incumbents switch to new technology?," Journal of Mathematical Economics, Elsevier, vol. 107(C).

    More about this item

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy

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