Aggregate Implications of Innovation Policy
NBER Working Paper No. 17493
We examine the quantitative impact of policy-induced changes in innovative investment by firms on growth in aggregate productivity and output in a fairly general specification of a model of growth through firms’ investments in innovation that nests several commonly used models in the literature. We present simple analytical results isolating the specific features and parameters of the model that play the key roles in shaping its quantitative implications for the aggregate impact of policy-induced changes in innovative investment in the short, medium and long-term and for the socially optimal innovation intensity. We find that under the assumption of no social depreciation of innovation expenditures (a common assumption in Neo-Schumpeterian models), the model’s implications for 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 are largely disconnected from the parameters that determine the model’s long-run implications and the socially optimal innovation intensity of the economy. We find, in contrast, that plausibly calibrated models based on the Expanding Varieties framework can imply substantial social depreciation of innovation expenditures and a tighter link between the model’s medium-term and long-term elasticities of aggregate productivity and output with respect to policy-induced changes in the innovation intensity of the economy.
Document Object Identifier (DOI): 10.3386/w17493
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