Research Subsidies and Innovation Improve Productivity

Most productivities theorists agree that understanding the economics of innovation and technological change is central to understanding why some suppliers grow faster than other suppliers. The driving force behind recent developments in innovation models of productivity is a desire to incorporate quality. Incorporating quality of produced products without the addition of restrictive razor's edge conditions implies that policy impacts the productivity. This paper makes productivity modeling along the lines of Barro and Becker (1989) and models an array of government policies to demonstrate how some policies can impact productivity in a productivity model without the addition of restrictive razor's edge conditions. In the author's model government policies are categorized according to whether they have profits only, profits and productivity, or no impact on profits and/or productivity. The model also predicts that a research subsidy promotes long run productivity.