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Subsidizing public inputs

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Author Info

  • Buckley, Neil
  • Mestelman, Stuart
  • Shehata, Mohamed

Abstract

Investment in research and development may (with some probability) lead to reductions in a firm’s production cost. If the production-cost savings associated with successful research and development is freely disseminated to other firms as soon as it is realized, too few resources may be allocated to this input. In such an environment, subsidies to the public input can lead to optimal input use. Four alternative subsidy instruments are considered in this paper. Two are incremental subsidies and the others are conventional level subsidies. One of the incremental subsidies and one of the level subsidies crudely capture characteristics of incentive mechanisms used in the United States and Canada. A laboratory implementation of these instruments generally confirms that incremental subsidies are inferior to level subsidies.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 87 (2003)
Issue (Month): 3-4 (March)
Pages: 819-846

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Handle: RePEc:eee:pubeco:v:87:y:2003:i:3-4:p:819-846

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Web page: http://www.elsevier.com/locate/inca/505578

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References

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  1. Glenn C. Loury, 1976. "Market Structure and Innovation," Discussion Papers 256, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Davis, Jon & Quirmbach, Herman & Swenson, Charles, 1995. "Income Tax Subsidies and Research and Development Spending in a Competitive Economy: An Experimental Study," Staff General Research Papers 5215, Iowa State University, Department of Economics.
  3. Isaac, R Mark & Reynolds, Stanley S, 1988. "Appropriability and Market Structure in a Stochastic Invention Model," The Quarterly Journal of Economics, MIT Press, vol. 103(4), pages 647-71, November.
  4. Isaac, R. Mark & Reynolds, Stanley S., 1992. "Schumpeterian competition in experimental markets," Journal of Economic Behavior & Organization, Elsevier, vol. 17(1), pages 59-100, January.
  5. Jon Vilasuso & Mark R. Frascatore, 2000. "Public policy and R&D when research joint ventures are costly," Canadian Journal of Economics, Canadian Economics Association, vol. 33(3), pages 818-839, August.
  6. Offerman, Theo & Sonnemans, Joep & Schram, Arthur, 1996. "Value Orientations, Expectations and Voluntary Contributions in Public Goods," Economic Journal, Royal Economic Society, vol. 106(437), pages 817-45, July.
  7. Hughes, Edward & McFetridge, D. G., 1985. "A theoretical analysis of incremental investment incentives with an application to the case of industrial R & D," Journal of Public Economics, Elsevier, vol. 27(3), pages 311-329, August.
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Citations

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Cited by:
  1. Kanagaretnam, Kiridaran & Mestelman, Stuart & Nainar, Khalid & Shehata, Mohamed, 2009. "The impact of social value orientation and risk attitudes on trust and reciprocity," Journal of Economic Psychology, Elsevier, vol. 30(3), pages 368-380, June.
  2. John Smith, 2012. "The endogenous nature of the measurement of social preferences," Mind and Society: Cognitive Studies in Economics and Social Sciences, Fondazione Rosselli, vol. 11(2), pages 235-256, December.
  3. Smith, John, 2009. "The endogenous nature of social preferences," MPRA Paper 16599, University Library of Munich, Germany.
  4. Neil Buckley & Kenneth Chan & James Chowhan & Stuart Mestelman & Mohamed Shehata, 2001. "Value Orientations, Income and Displacement Effects, and Voluntary Contributions," Experimental Economics, Springer, vol. 4(2), pages 183-195, October.
  5. Donja Darai & Jens Grosser & Nadja Trhal, 2009. "Patents versus Subsidies – A Laboratory Experiment," SOI - Working Papers 0905, Socioeconomic Institute - University of Zurich.

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