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Should the government subsidize innovation or automation?

Published online by Cambridge University Press:  20 April 2022

Angus C. Chu ,
Guido Cozzi ,
Yuichi Furukawa  and
Chih-Hsing Liao
Angus C. Chu
Affiliation:
Department of Economics, University of Macau, Macau, China
Guido Cozzi
Affiliation:
Department of Economics, University of St. Gallen, St. Gallen, Switzerland
Yuichi Furukawa
Affiliation:
Faculty of Economics, Aichi University, Nagoya, Japan
Chih-Hsing Liao*
Affiliation:
Department of Economics, National Central University, Taoyuan, Taiwan
*
*Corresponding author. Email: chihhsingliao@gmail.com
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Abstract

This study introduces automation into a Schumpeterian growth model to explore the effects of R&D and automation subsidies. R&D subsidy increases innovation and growth but decreases the share of automated industries and the degree of capital intensity in the aggregate production function. Automation subsidy has the opposite effects on these macroeconomic variables. Calibrating the model to US data, we find that raising R&D subsidy increases the welfare of high-skill workers but decreases the welfare of low-skill workers and capital owners, whereas increasing automation subsidy increases the welfare of high-skill workers and capital owners but decreases the welfare of low-skill workers. Therefore, whether the government should subsidize innovation or automation depends on how it evaluates the welfare gains and losses of different agents in the economy.

Keywords

Automationinnovationeconomic growth
Type
Articles
Information
Macroeconomic Dynamics , Volume 27 , Issue 4 , June 2023 , pp. 1059 - 1088
Copyright
© The Author(s), 2022. Published by Cambridge University Press

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