The Effects of Education Subsidy in an R&D Based Economy

Abstract

This paper aims to study the effects of education subsidies in an R&D-based economy. I develop a Schumpeterian growth model that incorporates both variety innovations and quality improvements, with endogenous population growth and the accumulation of human capital. The results show that the effects of education subsidy policy may be contrary to its intended objectives. Specifically, it hinders long-term economic growth when the population growth rate is constant or decreases with the education subsidy. This occurs because the subsidy expands variety innovation but impedes quality improvements, and also reduces the value of the quality-adjusted market size of intermediate goods, which determines the long-term economic growth rate. However, the effects become ambiguous if the population growth rate increases with the education subsidy, which tends to reduce or even reversing the subsidy’s impact.