Endogenous Growth Without Scale Effects: Comment

Segerstrom (1998) demonstrates that the social optimum requires “radical” technological breakthroughs to be treated less favorably than “incremental” innovations in a growing economy. The aim of this note is to assess the robustness of this welfare result on the basis of two levels of generalization: (i) the elasticity of substitution between any two goods is allowed to be larger than one, and (ii) inter-industry spillovers are introduced. We show that Segerstrom’s results can be reversed. It is also shown that in contrast to Segerstrom, R&D subsidies can be globally optimal, irrespective of the size of innovation, when inter-industry spillovers are large.