Optimal Policy and Non-Scale Growth with R&D Externalities

An established result of the endogenous growth literature is that competitive equilibria in expanding-varieties models are suboptimal due to the rent-e¤ect: monopolistic pricing drives the equilibrium quantity of each intermediate below the e ¢ cient level, implying that it is optimal to subsidize \u85nal producers. This paper shows that, if scale e¤ects are eliminated by including R&D spillovers in the model, normative prescriptions change. Since the laissez-faire economy under-invests into R&D activity, the share of resources devoted to intermediatesproduction increases, and this reallocation e¤ect contrasts the rent-e¤ect. In many scenarios, including the polar case of logarithmic preferences, the reallocation e¤ect surely dominates: the equilibrium quantity of each intermediate exceeds the optimal one, and the optimal policy consists of taxing \u85nal producers because \u85scal authorities must internalize the overshooting mechanism generated by under-investment in R&D