Creative Destruction and Policy in a Model of Endogenous Growth

Abstract This paper extends a model of endogenous growth through the introduction of a component of knowledge that makes new technologies more productive than older vintages. Creative destruction or obsolescence of technologies underlies the growth process. In this setup, the growth effects of various policies are analyzed. These policies include selective subsidies to firms that produce final output, a general lump-sum tax on final-output firms, and openness to trade with a less developed country. The results show the existence of growth effects that have not been studied in the previous literature.