Working Paper: CEPR ID: DP15804
Authors: Ufuk Akcigit; Sina T. Ates; Giammario Impullitti
Abstract: What is the role of innovation policy in open economy? We address this question employ- ing a new innovation-driven growth model with two large open economies at different stages of development. We examine the implications of the U.S. Research and Experimentation Tax Credit, introduced in 1981, and alternative protectionist policies. Key findings are: First, the tax credit generates substantial gains over medium and long horizons. Second, protectionist measures generate large dynamic losses by distorting the firms’ innovation incentives. Third, the optimal R&D subsidy decreases in trade openness. Fourth, the optimal unilateral import tariff is zero for all policy horizons.
Keywords: economic growth; innovation policy; open economy; trade policy
JEL Codes: F13; F43; F60; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| U.S. research and experimentation tax credit (1981) (H20) | innovation and productivity gains (O49) |
| protectionist measures (F13) | dynamic losses in innovation activity (O39) |
| trade openness (F43) | optimal R&D subsidy (O38) |
| trade protection (F13) | reduced innovation incentives (O39) |