Working Paper: CEPR ID: DP17549
Authors: Teodora Borota; Fabrice Defever; Giammario Impullitti; Adam Spencer
Abstract: We build a two-region endogenous growth model to analyse the gains from innovation policy cooperation in an economic union. The model is calibrated to two blocks of the EU: the old and new members. R&D subsidy coordination is motivated by the distortion from subsidy competition, the strategic motive, and by intertemporal knowledge spillovers, which drive growth. The ideas production function features decreasing returns, making growth semi-endogenous, where policyaffects growth temporarily. We compute gains from harmonised subsidies, chosen in each region to maximise EU welfare, with respect to competitive and observed subsidies. First, we find substantialgains to coordination, which derive exclusively from the strategic motive. Second, extending to include endogenous idea flows via FDI gives knowledge spillovers as the main driver of coordinationgains. Third, extending to fully endogenous growth gives similar results. Fourth, conclusions based on steady state analysis have misleading optimal subsidies and overstate the estimated gains.
Keywords: Innovation policy; Endogenous growth theory; International policy coordination; EU integration; FDI spillovers
JEL Codes: O31; O41; O38; F12; F42; F43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Steady-state analysis (C62) | overstate estimated gains from cooperation (C71) |
| Coordination of R&D subsidies (O38) | substantial gains (G11) |
| Subsidy competition (D41) | profits shift to innovating region (O39) |
| Incorporating endogenous idea flows via FDI (F23) | knowledge spillovers (O36) |
| Collaboration (O36) | overall innovation efficiency (O35) |
| Fully endogenous growth model (O41) | similar results (C59) |
| Policy impacts (F69) | growth through intertemporal knowledge spillovers (O36) |