Innovation Driven Economic Growth in Multiple Regions and Taxation

Abstract

We provide the first theoretical analysis of the effects of alternate forms of taxation on economic growth in a dynamic model with multiple regions. The regions are heterogeneous, but, in each region, consumers have constant relative risk aversion preferences, there is no growth in the stock of human capital, and there are three kinds of manufacturing activities involving the production of blueprints for inputs or machines, the inputs or machines themselves, and a single consumption good. Our analysis generates four salient findings. First, we define the multiregion equilibrium. Second, we characterize the multiregion equilibrium and show that in this equilibrium, each region grows at a constant rate starting at time t = 0. Third, we show that except in knife-edge cases, output in each region grows at a different long-run rate. Finally, we determine the effects of asset, profit, and investment taxes on the economic growth rates of the regions under study.