On the Growth and Welfare Effects of Defense R&D

Authors


  • Angus C. Chu, Durham Business School, Durham University, Durham, UK, and School of Economics, Shanghai University of Finance and Economics, Shanghai, China (angusccc@gmail.com). Ching-Chong Lai, Institute of Economics, Academia Sinica, Taipei, Taiwan; Department of Economics, National Cheng Chi University, Taipei, Taiwan; Institute of Economics, National Sun Yat-Sen University, Kaohsiung, Taiwan (cclai@econ.sinica.edu.tw).

  •  The authors are very grateful to the anonymous referees for their insightful comments and helpful suggestions. Chu also gratefully acknowledges the support by Leading Academic Discipline Program, 211 Project for Shanghai University of Finance and Economics (the 3rd phase). The usual disclaimer applies.

Abstract

In the United States, defense R&D share of GDP has decreased significantly since 1960. To analyze the implications on growth and welfare, we develop an R&D-based growth model that features the commonly discussed crowding-out and spillover effects of defense R&D on civilian R&D. The model also captures the effects of defense technology on (a) national security resembling consumption-type public goods and (b) aggregate productivity via the spin-off effect resembling productive public goods. In this framework, economic growth is driven by market-based civilian R&D as in standard R&D-based growth models and government-financed public goods (i.e., defense R&D) as in Barro (1990). We find that defense R&D has an inverted-U effect on growth, and the growth-maximizing level of defense R&D is increasing in the spillover and spin-off effects. As for the welfare-maximizing level of defense R&D, it is increasing in the security-enhancing effect of defense technology, and there exists a critical degree of this security-enhancing effect below (above) which the welfare-maximizing level is below (above) the growth-maximizing level.

Ancillary