Why it pays off to pay us well: The impact of basic research on economic growth and welfare

Research Policy, 2016, vol. 45, issue 5, 1075-1090

Abstract: We analyze the growth and welfare effects of governmental basic research investments in an R&D-based growth model with endogenous fertility and endogenous education. In line with the empirical evidence, our model accounts for (i) the negative effect of population growth on economic growth, (ii) the positive effect of education on economic growth, (iii) the positive association between the level of per capita GDP and expenditures for basic research, and (iv) the gestation lag of basic research investments. Our results indicate that there exists an interior long-run welfare-maximizing investment rate in basic research that is much higher than the rates observed in OECD countries. The model-based explanation that we provide for this discrepancy is that raising public investments in basic research toward the optimal level reduces the growth rate of GDP and welfare in the short run because taxes have to increase and resources have to be drawn away from other productive sectors of the economy. These adverse short-run welfare effects are one potential explanation for the reluctance of governments and their currently living voters to increase public R&D expenditures despite the long-run benefits of such a policy.

Keywords: R&D-based growth; Basic science; Optimal governmental research policies; Endogenous schooling; Endogenous fertility (search for similar items in EconPapers)
JEL-codes: H41 J11 J24 O32 O41 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (30)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:respol:v:45:y:2016:i:5:p:1075-1090

DOI: 10.1016/j.respol.2016.03.001

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