Dynamically Optimal R\& D Subsidization

Previous research on optimal R\& D subsidies has focussed on the long run. This paper characterizes the optimal time path of R\& D subsidization in a semi- endogenous growth model, by exploiting a recently developed numerical method. Starting from the steady state under current R\& D subsidization in the US, the R\& D subsidy should significantly jump upwards and then slightly decrease over time. There is a negligible loss in welfare, however, from immediately setting the R\& D subsidy to its optimal long run level, compared to the case where the dynamically optimal policy is implemented.