R&D Subsidies and Economic Growth

Abstract

We present an endogenous growth model in which some firms devote resources to developing higher-quality products (innovative RD imitative R&D subsidies actually lead to slower economic growth. A key assumption driving these conclusions is that R&D activities are subject to decreasing returns. When R&D activities are subject to constant returns, as is commonly assumed, the only equilibrium with both innovation and imitation is unstable.