Optimal growth through innovation, investment, and labor

We investigate optimal growth in an endogenous growth model with leisure, investment, and capital-based innovation for new intermediates under monopolistic competition. We find a unique optimal path that converges monotonically to balanced growth in finite periods in contrast to indefinite fluctuations on the market-equilibrium path. The market equilibrium yields higher levels of intermediates but lower levels of labor, investment, innovation, and growth than their optimal levels. Appropriate taxes and subsidies can eliminate the inefficiencies and fluctuations to obtain optimal growth. Quantitatively, the welfare gain of optimal taxes and subsidies exceeds a 20% increase in consumption from the US tax system. (C) 2020 Elsevier B.V. All rights reserved.