Abstract for: The influence of subsidies on economic development: a system dynamics model

Many governments across the world put into practice different policies of subsidies to achieve goals of economic progress in spite of economic theory’s arguments, which claims that subsidies hamper the efficient allocation of resources. But if a government decides to implement such policy, what type of subsidy has a higher impact on economic growth? This paper examines the issue constructing a system dynamics model in which the effects of two types of direct subsidies are analysed: production and research and development subsidies. The model is based on feedback processes, non-linear relationships and delays that explain the decisions taken by different economic agents in a generic economy regarding physical capital accumulation, technological development and size of an intermediate sector. Using a system dynamics simulation the conditions under what either the use of each subsidy separately or a certain combination between them have a higher impact on economic development are characterized. Key words: Subsidies, Research and development, Economic growth, System dynamics, Computer simulation.