Introduction to Modern Economic Growth It is also straightforward to verify that as in the models of the previous section, there is a scale effect, and thus population growth would lead to an exploding growth path Exercise 14.9 asks you to construct an endogenous growth model of competitive innovations without scale effects 14.1.5 Policy in the Model of Competitive Innovations We can also use the model of competitive innovations to analyze the effects of policy on economic growth As in the model of the previous few chapters, anti-trust policy, patent policy and taxation will affect the equilibrium growth rate For example, two economies that tax corporate incomes at different rates, say τ and τ , will grow at different rates There is a sense in which the current model is much more appropriate for conducting policy analysis than the expanding varieties models, however In those models, there was no reason for any agent in the economy to support distortionary taxes (which reduce the growth rate).1 In contrast, the fact that growth takes place through creative destruction here implies that there is a natural conflict of interest, and certain types of policies may have a constituency To illustrate this point, which will be discussed in greater detail in Part of the book, suppose that there is a tax τ imposed on R&D spending This has no effect on the profits of existing monopolists, and only influences their net present discounted value via replacement Since taxes on R&D will discourage R&D, there will be replacement at a slower rate, i.e., z ∗ will fall This increases the steady-state value of all monopolists given by (14.17) In particular, denoting the value of a monopolist with a machine of quality q by V (q), we have βLq , r∗ (τ ) + z ∗ (τ ) where the equilibrium interest rate and the replacement rate have been written as V (q) = functions of τ With the tax rate on R&D, the free entry condition, (14.13) becomes V (q) = (1 + τ ) q λη 1Naturally, one can enrich these models so that tax revenues are distributed unequally across agents, for example, with taxes on capital distributed to workers In this case, even in the basic neoclassical growth model, some groups could prefer distortionary taxes Such models will be discussed in Part of the book 622