We study the equilibrium implications of changes in the fiscal policy mix on macroeconomic quantities, asset prices, and welfare, utilizing two endogenous growth models. The expanding variety model features only homogeneous innovations by entrants. The Schumpeterian growth model features heterogeneous innovations: 'incremental' innovations by incumbents and 'radical' innovations by entrants. The government finances its expenditure stream by labor income and corporate taxes and supplies subsidies to household's consumption, to final goods firm's capital investment, and to investments in research and development (R&D) by entrants and, if applicable, incumbents. Regardless of the innovation structure, an increase in government expenditure, consumption, or capital investment subsidies induces lower economic growth resulting in sizeable welfare costs. Differently, higher R&D subsidies generate sizable welfare gains of the order of 7% in the homogeneous innovation model and 36% in the heterogeneous innovation model. However, in the heterogeneous innovation model only subsidies to incumbents are growth-enhancing and welfare-improving, whereas subsidies to entrants lead to lower growth and welfare. Fiscal policies should, therefore, prioritize the allocation of resources to innovative incumbents.
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