The Impact of Regional R&D Subsidy in a Computable General Equilibrium Model

This article presents a computable general equilibrium model for the region of
Sardinia (Italy) with the purpose of investigating the macroeconomic impact of
research and development (R&D) policies. The model incorporates induced technical
change obtained through knowledge accumulation and external knowledge
spillovers. It turns out that the cost of R&D policies may change according to wage
setting in the region. Indeed, the likely size of the optimal subsidy that is required to
reach a given target growth is lower when wages are bargained locally compared to
the case where wages are bargained nationally. Furthermore, the capacity of such a
policy to generate knowledge spillovers from international and interregional trade is
quite modest. Indeed, the capacity of the regional system to internalize innovations
embedded in imported goods is partially offset by an increase in internal efficiency
that lowers the spillover intensity through a reduction in the share of imports.