Back to Basics: Basic Research Spillovers, Innovation Policy, and Growth

This article introduces a general equilibrium model of endogenous technical change through basic and applied research. Basic research differs from applied research in the nature and the magnitude of the generated spillovers. We propose a novel way of empirically identifying these spillovers and embed them in a framework with private firms and a public research sector. After characterizing the equilibrium, we estimate our model using micro-level data on research expenditures by French firms. Our key finding is that uniform research subsidies can accentuate the dynamic misallocation in the economy by oversubsidizing applied research. Policies geared towards public basic research and its interaction with the private sector are significantly welfare-improving.

Automated summary

This article introduces a general equilibrium model of endogenous technical change through basic and applied research. It suggests a novel empirical method to identify spillovers and highlights the potential issue of oversubsidizing applied research with uniform research subsidies. Policies focusing on public basic research and its interaction with the private sector are found to significantly improve welfare.