Fiscal policy in an endogenous groeth model with horizontally differentiated intermediate goods

Abstract

Theoretical and empirical work in endogenous growth theory suggests that market
economics underinvest in scientific and technical research and achieve growth rates that are
lower than the socially optimal. Among the suggested explanations are the positive productivity
spillovers associated with the nature of knowledge as a nonrival and only partially excludable
good, the monopolistic pricing of the product of R&D, and the related issue of imperfect patent
protection and imitation. This paper studies the above distortions in a model where technological
progress is the product of research activity and takes the form of expansions in the variety of
intermediate goods. The market and the socially optimal solutions are presented and the
first-best fiscal policy is considered for each case of market failure.