On the welfare effects of trade and innovation in vertically differentiated products
The paper is related to the recent literature on the effects of innovation and trade under product differentiation and imperfect competition. The model indicates that the impact effect of product innovation on social welfare and employment may well be negative when it involves the replacement of domestically produced quality goods by higher quality goods produced abroad. Even domestically generated product innovation may reduce the real wage, workers' welfare and employment when it is accompanied by process innovation in the industry concerned. These results may be thought of as providing a tentative argument based on general equilibrium analysis for government subsidisation of domestic R\&D in addition to the traditional argument that seeks to justify such a policy on the basis of a pure profit-shifting incentive.
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