Aggregate implications of innovation policy

We examine the quantitative impact of changes in innovation policies on growth in aggregate productivity and output in a fairly general specification of a growth model in which aggregate productivity growth is driven by investments in innovation by imperfectly competitive firms. Our model nests several commonly used models in the literature. We present simple analytical results isolating the specific features and/or parameters of the model that play the key roles in shaping its quantitative implications for the aggregate impact of policy-induced changes in innovative spending in the short-, medium- and long-term. We find that the implicit assumption made commonly in models in the literature that there is no social depreciation of innovation expenditures plays a key role not previously noted in the literature. Specifically, we find that the elasticity of aggregate productivity and output over the medium term horizon (i.e. 20 years) with respect to policy-induced changes in the innovation intensity of the economy cannot be large if the model is calibrated to match a moderate initial growth rate of aggregate productivity and builds in the assumption of no social depreciation of innovation expenditures. In this case, the medium term dynamics implied by the model are largely disconnected from the parameters of the model that determine the model's long run implications and the socially optimal innovation intensity of the economy.