Abstract
Due to the public good nature of basic research, the mechanisms for rewarding talent are very different from those prevailing in the production of applied research by private actors. We develop a growth model in which such mechanisms are taken explicitly into account. This allows us to address the following fundamental questions: how do policies in the public research sector influence the effort and risk-taking decisions of researchers of different talent? How do these choices affect the aggregate production of basic research? What is the final impact on growth? The analysis shows that the design of research evaluation policies crucially affects both the long run rate of growth and the relationship between taxation and growth. A key and novel channel through which this occurs is the effect of basic research policy on the expected non-monetary benefits from being a researcher.
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