Working Paper: NBER ID: w31703
Authors: Yan Bai; Keyu Jin; Dan Lu
Abstract: What are a country’s policy options concerning the development of emerging technologies in a global economy? To address this question, we investigate optimal dynamic policies in an open economy where technology is endogenously accumulated through R&D innovation. Our key insight is that a country has incentives to influence foreign innovation efforts across sectors and over time—giving rise to optimal policies even when private innovation allocations are (Pareto) efficient. We derive explicit expressions for optimal taxes linked to both an intratemporal and an intertemporal motive to manipulate foreign technology. To affect foreign forward-looking innovation decisions, Home uses committed future trade policies (Ramsey) or innovation policies (Markov). For intratemporal price manipulation, Home government imposes higher tariffs in sectors where it has a comparative advantage.
Keywords: technological rivalry; optimal dynamic policy; open economy; endogenous technology; R&D innovation
JEL Codes: E23; F12; F63; O38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| optimal taxes (H21) | foreign innovation efforts (O36) |
| higher tariffs (F19) | foreign innovation efforts (O36) |
| domestic innovation subsidies (O38) | foreign innovation efforts (O36) |
| time-consistent Markov policies (D15) | foreign innovation efforts (O36) |
| optimal policies (when technology is exogenous) (C61) | uniform tariffs (F13) |