The paper compares the way economies with exogenous and endogenous innovation respond to capital income taxes. If innovation is exogenous, tax cuts increase saving. If innovation is endogenous, tax cuts increase innovation as well. Faster innovation raises capital productivity and calls forth still more saving. A larger capital stock lowers the discount rate, increases the present value of monopoly profit and calls for faster innovation. How large a difference endogenous innovation might make is an open question. We calculate numerical solutions of a model including features of the U.S. tax code that affect incentives to innovate. The results suggest that models with exogenous innovation substantially underestimate long-run effects of capital income taxes. Copyright Blackwell Publishing, Inc. 2002.
Recently new welfare-enhancing roles have been identified for the policy of export subsidization. They include the use of export subsidies to generate terms of trade gains via market linkages under perfect competition, to extract international profits under oligopoly, and to correct informational distortions of new product quality under monopoly. This paper identifies another role: coordinating bilateral export subsidies to counteract consumption distortions under monopolist competition, which can be both nationally and globally welfare improving. Reflecting structural characteristics, analytical conditions are derived to dictate coordination in a general equilibrium twocountry framework. Numerical aspects of the structurally determined coordination 'range' are also provided.
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