On the Policy Implications of Endogenous Technological Progress

One of the most well-known empirical regularities in the R&D-productivity literature is the existence of substantial under-investment in R&D. This strongly suggests that government should actively promote research activities. However, the so-called "quality-ladders" models of endogenous technological progress are inconsistent with this observation. In an extreme case, Grossman and Helpman (1991,Ch.4) suggest that R&D should always be taxed irrespective of the size of quality improvement. This paper attempts to reconcile these empirical and theoretical findings by showing that the normative results of Grossman and Helpman are not robust