Optimal R&D subsidies in a model with physical capital, human capital and varieties

In this paper, we analyze the social planner solution of an endogenous growth model with physical capital, human capital and R&D. The model incorporates three sources of inefficiency: monopolistic competition in the intermediate-goods sector, duplication externalities and spillovers in R&D. A complete stability analysis for the optimal growth problem of this model is provided. We characterize the optimal policy that can decentralize the optimal solution and find that the path of the optimal R&D subsidy can be non-monotonic.

► We model the centralized problem of a model with physical, human capital and R&D. ► We derive the stability conditions of the steady-state of that problem. ► We characterize the decentralized solution of such a model (with government). ► We obtain the optimal policy that can decentralize the optimal solution. ► We conclude that the path of the optimal R&D subsidy can be nonmonotonic.