Haste Makes Waste? Quantity-Based Subsidies Under Heterogeneous Innovations

64 Pages Posted: 22 Jul 2022

See all articles by Linyi Cao

Linyi Cao

Shanghai University of Finance and Economics

Helu Jiang

Shanghai University of Finance and Economics

Guangwei Li

ShanghaiTech University - School of Entrepreneurship and Management

Lijun Zhu

Peking University

Date Written: July 22, 2022

Abstract

With quantity-based innovation targets and subsidy programs launched since the mid-2000s, Chinese patents have seen a sharp increase in number, accounting for 46% of the world’s total patent applications in 2020; however, their overall quality has been steadily declining over time. This paper develops a Schumpeterian growth model featuring innovating firms’ quantity-quality trade-off between radical and incremental innovations, and decomposes subsidies’ impact on growth and welfare into quantity and quality channels. We calibrate the model to Chinese firm-level R&D data in the early 2010s. The model-based quantitative analysis shows that the quality channel effects are negative and dominant, and quantity-based subsidies reduce welfare by around 9%. We evaluate welfare gains under a constrained planner’s problem, and propose a quality-biased subsidy — subsidizing the human capital accumulation —which effectively recovers the optimal allocation.

Keywords: Heterogeneous Innovations, Quantity-Based Subsidies, Human Capital

JEL Classification: O31, O38, O40

Suggested Citation

Cao, Linyi and Jiang, Helu and Li, Guangwei and Zhu, Lijun, Haste Makes Waste? Quantity-Based Subsidies Under Heterogeneous Innovations (July 22, 2022). ShanghaiTech SEM Working Paper No. 2022-003, Available at SSRN: https://ssrn.com/abstract=4169354 or http://dx.doi.org/10.2139/ssrn.4169354

Linyi Cao

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK 200433
China

Helu Jiang

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

Guangwei Li (Contact Author)

ShanghaiTech University - School of Entrepreneurship and Management ( email )

100 Haike Rd
Pudong Xinqu, Shanghai
China

Lijun Zhu

Peking University ( email )

No. 38 Xueyuan Road
Haidian District
Beijing, Beijing 100871
China

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
155
Abstract Views
722
Rank
345,836
PlumX Metrics