Patent protection and public capital accumulation

Abstract

This paper examines the balanced-growth-maximizing public investment policy in a growth model where the engines of economic growth are private R&D and public capital accumulation. The government allocates tax revenue between new investment and maintenance expenditure for public capital. We consider how the balanced-growth-maximizing public investment policy changes as patent protection becomes stronger, as has been done in many countries. The results show that as patent protection becomes stronger, the income tax rate to finance public investment should be lower and the expenditure share of new investment should be higher. The balanced-growth-maximizing public investment policy leads to a smaller government as patent protection becomes stronger. This paper also shows that the balanced-growth-maximizing public investment policy is equivalent to the welfare-maximizing public investment policy along the balanced growth path. We also characterize both the growth-maximizing and welfare-maximizing combination of public investment policy and patent policy along the balanced growth path.