Abstract
We extend a second-generation Schumpeterian growth model to incorporate human capital accumulation to clarify the general equilibrium effects of subsidy policies on human capital accumulation and R&D activities in a unified framework. Despite the conventional argument that subsidies always stimulate these growth-promoting activities, we find that subsidies asymmetrically affect human capital accumulation and R&D activities. Our theoretical results suggest that research using standard models of human capital might find false negative relationships between education subsidies and economic growth.
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We wish to thank Ronald Harstad, Akiomi Kitagawa, Fumio Ohtake, Akihisa Shibata, John Stachurski and participants of the annual conference of the Western Economic Association International for their helpful comments and suggestions. We would like to acknowledge the research grants provided by the Global Center of Excellence programs of Keio University, Kyoto University and Osaka University.