Abstract
This paper investigates the optimal government spending ratio on the research sector by introducing government effects into Romer’s endogenous model. The government spending has positive effects on both the final-output sector and the research sector. Under this circumstance, we first show that there exists a minimum government spending proportion to maintain endogenous growth and there are two optimal spending ratios on the research sector given a constant government proportion. Then we analyze how the government chooses between these two ratios. When the government is interested in the balanced growth rate, it will always choose the high spending ratio on the research sector. But since there is a dynamic transition process in our model, short-run welfare must be taken into the government’s account. If the stock of endowed knowledge is much more than that of endowed physical capital, then the government will choose the low spending ratio on the research sector.
Highlights
Economic growth is always one of the most attractive and fascinating topics for all economists
This paper investigates the optimal government spending ratio on the research sector by introducing government effects into Romer’s endogenous model
We first show that there exists a minimum government spending proportion to maintain endogenous growth and there are two optimal spending ratios on the research sector given a constant government proportion
Summary
Economic growth is always one of the most attractive and fascinating topics for all economists. Romer (1990) [1] presents how technological change contributes to it In his model, the motivation of designing a new instruction for working with raw materials is market incentives. Only the stock of knowledge and human capital employed account for a new design. Barro (1990) [2] incorporates a public sector into a simple constant-returns model of economic growth and shows how familiar externalities of government spending drive the economy to grow. The last part takes short-run analysis into account because there is a dynamic transition process in the model, and derives the relation between government spending ratio on the research sector and the ratio in specific form of endowed stock of knowledge and endowed physical capital
Published Version (Free)
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have