Work package 9 – Modification of macro-models and tests

By ,

Participants: Seureco, ICCS, FPB

The objective of this work package is the improvement of the Econometric Model NEMESIS and the General Equilibrium Model GEM-E3 that are complementary in their economic properties. NEMESIS and GEM-E3 have already endogenous technical change mechanisms, which link innovations realized by sectors to knowledge accumulation and diffusion (between production sectors and countries), and to the profit maximization behaviour of the representative firms. But the representation of endogenous technical change in NEMESIS and GEM-E3 is too simple to describe many aspects of public innovation policies. For example, concerning R&D subsidies and R&D tax credits, they will act in a similar way in the model. R&D decisions are based on R&D cost, independently of the way they are financed. But, as WP3 “Subsidies and Tax Credits” will detail, R&D subsidies and R&D tax credits will have distinct incentive effect on R&D decision. The impact of public incentive will also be differentiated, depending on their sectoral allocation and on the technological areas they concentrate on.

Also, for subsidies, the origin, National or European, will have distinct crowding-in (-out) effects on private R&D effort.

Also, concerning demand-driven innovation, the demand addressed to the sector boosts its R&D and then its innovation, and a mechanism of demand-driven R&D is already present in NEMESIS and GEM-E3 Another mechanism of demand-driven innovation can be added in the models by mean of a learning-by-doing approach, where innovation (productivity) is linked to past experience. This is particularly relevant to the energy modules of the NEMESIS and GEM-E3 models, and can be achieved with “experience curves” where productivity depends on accumulation variables (as cumulated investment or production).But these representations of demand-driven innovation are still too much simplified to describe many aspects of what SIMPATIC wants to address in terms of user-involvement in R&D. For this reason, the models must be modified, taking into account specific micro insights from RA2 for the use of the macro simulation models NEMESIS and GEM-E3.

For demand-led innovation, the important point will not be only about specifying the demand side in more detail, but also about the actual interactions between demand and supply, and about the specific effects of demand-led innovation. This illustrates the need to go beyond the notion of productivity, which is currently the main vehicle for modelling the impact of R&D at the aggregate level. Demand-led innovation implies that demand patterns (i.e., how aggregate consumption and productive demand is distributed over sectors) is both determined by and determines R&D and innovation. This interaction between demand and innovation will constitute a major building-block of the NEMESIS and GEM-E3 models.

In order to be able to assess for ‘flex-security’ policies, the functioning of labour markets in NEMESIS will be modified. The increase in flexibility will be taken into account through a reduction of labour adjustment costs. It will lead to a shortening of the delays between the optimal time and the actual time for an enterprise to lay-off.

The originality of the flex-security lies also in the alternative methods that can be envisaged for financing this social protection. The possibility to transfer social contribution from labour taxation to other taxation scheme (direct or indirect) will be introduced in NEMESIS

Finally, the results of WP 8.3 “Impact of Social Innovation on Performance” will be incorporated in NEMESIS if the results of this work-package give insights on of building robust indicators social innovation and social capital.

The macro sectoral econometric model NEMESIS is relatively well adapted to a transformation of its basic R&D innovation module because the model is not entirely based on optimisation. The general equilibrium model

GEM-E3 will be used because it enables to model the energy sector in detail. The main modifications of GEM-E3 model will concern its energy part in order to assess energy policy cases. The experience curves will be adapted to the energy technologies in production and utilization sectors.