Abstract:
We introduce the distinction between basic research and development
nside a standard horizontal innovation framework. Multi-stage R&D is
erformed by private agents only. Basic research has the highest level of
enerality, implying inter-sector spillovers. Development spillovers bene t
evelopment only. In this set up, the counterfactual scale effect character-
zing standard horizontal innovation literature disappears endogenously.
n terms of R&D policy, the model shows that the social optimum is
ttained by subsidizing only basic research. The implied scal policy on
R&D is consistent with US data on federal support to privately performed
R&D.