This paper develops a dynamic general equilibrium model of economic growth. The model has a steady-state equilibrium in which some firms devote resources to discovering qualitatively improved products and other firms devote resources to copying these products. Rates of both innovation and imitation are endogenously determined on the basis of the outcomes of $R & D$ races between firms. Innovation subsidies are shown to unambiguously promote economic growth. Welfare is enhanced, however, only if the steady-state intensity of innovative effort exceeds a critical level.

This paper develops a dynamic general equilibrium model of economic growth. The model has a steady-state equilibrium in which some firms devote resources to discovering qualitatively improved products and other firms devote resources to copying these products. Rates of both innovation and imitation are endogenously determined on the basis of the outcomes of $R & D$ races between firms. Innovation subsidies are shown to unambiguously promote economic growth. Welfare is enhanced, however, only if the steady-state intensity of innovative effort exceeds a critical level.