RESEARCH-AND-DEVELOPMENT SUBSIDIES AND ECONOMIC-GROWTH

We present an endogenous growth model in which some firms devote resou rces to ner eloping higher-quality products (innovative R&D) and other firms devote resources to copying these products (imitative R&D). Alt hough consumers benefit from the knowledge created by both types of R& D activities, only innovative R&D subsidies lead to faster economic gr owth; imitative R&D subsidies actually lead to slot-ver economic growt h. A key assumption driving these conclusions is that R&D activities a re subject to decreasing rearms. When R&D activities are subject to co nstant returns, as is commonly assumed, the only equilibrium with both innovation and imitation is unstable.