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Incentivizing R&D: Prize or subsidies?

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  • Fu, Qiang
  • Lu, Jingfeng
  • Lu, Yuanzhu

Abstract

This paper studies the optimal design of R&D contests. A “sponsor” (e.g. the US Department of Defense or the World Health Organization) wants to improve the quality of the winning products. To do so, it partitions its budget between two schemes: an inducement prize and efficiency-enhancing subsidies to the firms competing in the contest. Prizes and subsidies have different functions, and they provide complementary incentives. In the optimally designed contest, subsidies increase while the prize decreases, if the innovation process is more challenging. Further, sensible conditions are identified under which the optimal contest implements either a “handicapping” scheme (by preferentially subsidizing the “underdog”) or a “national champion” scheme (by favoring the “favorite”). Our analysis yields a number of useful implications and sheds light on an array of R&D incentive schemes, such as the DoD's design competitions and vaccine development incentives.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 30 (2012)
Issue (Month): 1 ()
Pages: 67-79

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Handle: RePEc:eee:indorg:v:30:y:2012:i:1:p:67-79

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Web page: http://www.elsevier.com/locate/inca/505551

Related research

Keywords: R&D tournament; Contest design; Inducement prize; Research subsidies;

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References

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Cited by:
  1. Busom, Isabel & Corchuelo, Beatriz & Martinez Ros, Ester, 2012. "Tax incentives or subsidies for R&D?," MERIT Working Papers 056, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  2. Isabel Busom & Beatriz Corchuelo & Ester Martínez-Ros, 2011. "Tax incentives and direct support for R&D : what do firms use and why?," Business Economics Working Papers id-11-03, Universidad Carlos III, Instituto sobre Desarrollo Empresarial "Carmen Vidal Ballester".

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