Technological Rivalry and Optimal Dynamic Policy in an Open Economy

What are a country’s policy options concerning the development of emerging technologies in a global economy? To address this question, we investigate optimal dynamic policies in an open economy where technology is endogenously accumulated through R&D innovation. Our key insight is that a country has incentives to influence foreign innovation efforts across sectors and over time—giving rise to optimal policies even when private innovation allocations are (Pareto) efficient. We derive explicit expressions for optimal taxes linked to both an intratemporal and an intertemporal motive to manipulate foreign technology. To affect foreign forward-looking innovation decisions, Home uses committed future trade policies (Ramsey) or innovation policies (Markov). For intratemporal price manipulation, Home government imposes higher tariffs in sectors where it has a comparative advantage.