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The effect of subsidy policies on the product quality improvement

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  • Shin, Inyong
  • Kim, Hyunho

Abstract

This paper analyzes the effect of government subsidy policies on creating an incentive for domestic firms to improve their product quality before exporting to an outside market. The goal of the government is to minimize the time it takes to reach the appropriate product quality level at low costs. We simulate a dynamic profit maximization problem of the firm and derive the optimal path of the product quality development, then test the efficiency of the three types of subsidy methods: Constant Subsidy, Quality Matching Subsidy and Time-limited Subsidy methods. Our model yields a number of intriguing results: (i) not every subsidy methods guarantee product quality development, although the same amount is subsidized. (ii) the matching fund style subsidy is more efficient than providing constant amount of subsidy. (iii) Time-limited Subsidy improves product quality faster than the unlimited subsidy method. (iv) Time-limited Subsidy improves quality much faster than other methods with less subsidy cost. (v) there is an optimal combination between the subsidy and the time limits.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 27 (2010)
Issue (Month): 3 (May)
Pages: 687-696

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Handle: RePEc:eee:ecmode:v:27:y:2010:i:3:p:687-696

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Web page: http://www.elsevier.com/locate/inca/30411

Related research

Keywords: Subsidy policy Quality improvement Dynamic optimization R&D Time;

References

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  1. Bagwell, Kyle, 1991. "Optimal Export Policy for a New-Product Monopoly," American Economic Review, American Economic Association, vol. 81(5), pages 1156-69, December.
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  5. Shy, Oz, 2000. "Exporting as a Signal for Product Quality," Economica, London School of Economics and Political Science, vol. 67(265), pages 79-90, February.
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  11. Bruno Cassiman & Reinhilde Veugelers, 2002. "R&D Cooperation and Spillovers: Some Empirical Evidence from Belgium," American Economic Review, American Economic Association, vol. 92(4), pages 1169-1184, September.
  12. Bhagwati, Jagdish N, 1988. "Export-Promoting Trade Strategy: Issues and Evidence," World Bank Research Observer, World Bank Group, vol. 3(1), pages 27-57, January.
  13. James A. Brander & Barbara J. Spencer, 1981. "Tariffs and the Extraction of Foreign Monopoly Rents under Potential Entry," Canadian Journal of Economics, Canadian Economics Association, vol. 14(3), pages 371-89, August.
  14. Roberto Alvarez & Raymond Robertson, 2004. "Exposure to foreign markets and plant-level innovation: evidence from Chile and Mexico," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 13(1), pages 57-87.
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