Do government policies affect growth? Examining a model with R&D and factor accumulation

R&D-based growth models with human capital accumulation reach a conclusion that long-run growth is unaffected by research activities and government policies and is only driven by preferences and human capital accumulation technology. Zeng (2003) shows that these results only hold when human capital is the unique input in its own production. This paper re-examines Zeng’s findings by introducing several modifications. First, it focuses only on vertical innovation. Second, it argues that human capital is more important than final output in terms of producing research outcome and, hence, replaces final output with human capital in the research equation. Third, it suggests an alternative human capital accumulation specification where knowledge level is an additional input. Finally, it assumes a unique income tax whose revenue is used to finance research activities. In this new model, long-run growth is shown to be determined by education and research technologies, and consumers’ preferences. In addition, there always exists an income tax/R&D subsidy rate that maximizes the rate of growth.