Economic theory suggests that market economies are likely to underprovide innovation because of the public good nature of knowledge. Empirical evidence from the United States and other advanced economies supports this idea. We summarize the pros and cons of different policy instruments for promoting innovation and provide a basic 'toolkit' describing which policies are most effective according to our reading of the evidence. In the short run, R&D tax credits and direct public funding seem the most productive, but in the longer run, increasing the supply of human capital (for example, relaxing immigration rules or expanding university STEM admissions) is likely more effective.

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1 August 2019

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Journal of Economic Perspectives 33(3) , pp.163-184, 2019

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DOI: 10.1257/jep.33.3.163

https://www.aeaweb.org/articles?id=10.1257/jep.33.3.163

This Journal article is published under the centre's Growth programme.

This publication comes under the following theme: Innovation drivers