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Lorenza Rossi
dK
K
K
d = sB
Y
Y
K
= (1
K
) (sB
d)
then
Y = B0 K + B1 K
and the rate of growth of capital
K
= sB0 K
K
+ sB1
d.
where
A=H
human capital increases labor productivity, with L = 1
Y = K H 1
H
K
=
H
K
If
H
H
>
while H
H
H
K
H < K
while H
H
H
K
H = K
K
K
=)
reduces, so that
=)
and
= 0.
increases,
increases, so that
K
K
K
K
decreases,
H/H
s
= H 1 =1
sK
K /K
solving for
=
sH
sK
Substituting this value in the low of motion of physical and human capital
K
K
= sK sH1
H
H
= sK sH1
H
H
(Y )
solving for Y
Y = B1
1
where B ( ) = B 1 1
K = B ( ) K
) Y
dK
Then,
K
= s (1
K
) B ( )
d = s (1
) B 1
thus if s (1 ) B ( ) > d =) K
K >0
Which is the eect of taxation on growth? The economy faces a
Laer Curve
Which is the optimal tax rate, i.e. the tax rate maximizing
growth?
We consider two models. 1) a model with exogenous savings; 2) A
model with endogenous savings (Ramsey approach)
K
K
=0:
sB 1 1
K
K
s (1
) B 1
1 +2
1
=0
solving for
=
which is the optimal tax rate, i.e. the tax rate that maximizes growth.
fC ,K g 1
max
s.t. K
Y
= (1 ) Y
= BK 1 G
C1
e
1
) BK 1
(1
1.
= 0:C
=
(1
= K : (1
=0
) (1
) BK 1
notice that G = B 1 1 K .
) BK
C = K
= 0
C
14
=
(1
C
|
2
14
=
(1
|
) (1
) BK
{z
MPK
) (1
G
}
) B 1 1
{z
}
MPK
(1 )
| {z }
(1
) BK
G
|{z}
Growth in consumption depends on: i) the gap between the MPK and
the rate of time preference ; ii) the intertemporal elasticity of
substitution .
Thus, Government aects the MPK through two channels: i) increase
in G raises the MPK to a point; ii) taxes always reduces the private
return of capital.
The main objective of a good Government is to balance these two
eects.
(1
(1
2 1
) B 1 1
K
K
(1
) B 1 1
C
C
fC ,K ,G g 1
s.t. Resource Constraint
max
Y = C +I +G
: K = Y C G = BK 1
i.e. :
or
C1
e
1
BK 1
The Social Planner FOCs wrt. consumption, capital and the costate
variable are:
H
C
H
2s.
G
H
3s.
K
H
4s.
1s.
= 0 : BK 1
= 0:C
(1
= K : BK 1
=0
1
= 1 =)
) K
C
Y
=1
G
= 0
G = K
) B 1 1
L
L
= n.
dK
might be constant, or
The rate at which new ideas are discovered, ,
an increasing function of A
= A
where and are constants.
Notice that with > 0 the productivity of research increases with the
stock of ideas that have already been discovered. On the contrary
with < 0, discovering new ideas becomes harder over time. With
= 0 the discovery rate is independent from the stock of knowledge.
L A
LA
L A
LA
(1
A
=0
A
= n and thus
A
n
= gA =
A
1
xj
j =1
xj
j =1
Z A
0
xj dj
For simplicity we will use the second denition. Notice that, whether
we use a discrete number of goods or a continuos number, results
remain unchanged.
Z A
0
xj dj
wLY
Z A
0
pj xj dj
where pj is the rental price for capital-goods and w the wage paid for
labor.
The FOCs imply:
Y
LY
= (1
pj
= L1Y xj
for each j
rxj
= 0
2 L1Y xj 1
= 0
{z
p j
p=
1+
p 0 (x )x
p
r=
1
r.
xj dj = K
Since the capital goods are each used in the same amount, x, the
previous equation can be used to determine x
K
x=
A
The nal good production function can be rewritten as
Y = L1Y
substituting for x =
K
A
Z A
0
x dj = L1Y Ax
Y = K (ALY )1
Y
A
P
+ A
PA
PA
Along the BGP r is constant and thus and PA must grow at the
same rate, which is the population growth rate n (when = 1 and
= 0). Thus, along the BGP
PA =
r n
r=
Y
LY
in the R&D sector, real wages are equal to the marginal product of
multiplied by the value of new ideas created, i.e. PA , thus
labor ,
A
wR = P
(1
Y
A = = (1
= P
LY
r n
r
then
) YA
n
(1 ) Y (1 )
1
=
=
LY
r n A Y
r nA
A
A =) A = L
Rearranging and considering that A = L
A
A = gA along
the BGP, then
1
gA
=
LY
r n LA
LA
LY
g A
r n
sR
1 sR
and sR =
LA
L
is
sR =
1
.
1 + rgAn
The market does not endogenize the fact that new research may aect
the productivity of future research. > 0, implies that productivity of
research increases with the stock of ideas. Researcher are not
compensated for their contribution toward improving the productivity
of future researcher. Thus, with > 0 the market provides too little
research and the fraction of population hired by R&S is too low. This
eect is called spillover eect or "standing on the shoulders eect".
With < 1 research productivity is lower because of duplications.
Thus, too many people are hired by the research sector. This eect is
called "stepping on toes eect".
Consumer surplus eect. The monopoly prots are less than the
consumer surplus. This eect tends to generate too little innovations.
OPTIMAL R&D
Classical economic theory: imperfect competition and monopoly are
bad for welfare and e ciency because they generate a
deathweight-loss in the economy. This happens because prices are
higher than marginal costs. However, the literature on the economic
of ideas suggests that it is the possibility to make prots, and thus to
set a markup over marginal costs, that incentives rms, or the R&D
sector, to produce more ideas.
This means, that there is a trade-o between short-run losses and
long-run gains.
Concluding. In deciding antitrust policies, the regulator has to
weight the deathweight losses against the incentive to innovate.