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R&D subsidy games: a cost sharing approach vs. reward for performance

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  • Richard Gretz

    ()

  • Jannett Highfill
  • Robert Scott

Abstract

This paper investigates government subsidy games for private sector research and development (R&D) in a two-country two-firm intra-industry trade model. Two funding structures are compared: “cost sharing” vs. “reward for performance.” Both the theoretical evidence and the results of a Monte Carlo simulation suggest that cost sharing is associated with higher social surplus and quality improvement because it prompts the firm to do more R&D. In a cost sharing program government and firm R&D are always complements. In the reward for performance program government and firm R&D may be complements, but are usually substitutes. In the Monte Carlo results the average firm contribution to R&D expenditure is actually negative with a reward for performance funding structure—raising the question of whether it might be construed as corporate welfare. Finally, the paper characterizes funding priorities for both structures in the case when subsidy dollars are scarce and when they are not. Copyright Springer Science+Business Media, LLC 2012

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Bibliographic Info

Article provided by Springer in its journal The Journal of Technology Transfer.

Volume (Year): 37 (2012)
Issue (Month): 4 (August)
Pages: 385-403

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Handle: RePEc:kap:jtecht:v:37:y:2012:i:4:p:385-403

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Web page: http://www.springerlink.com/link.asp?id=104998

Related research

Keywords: R&D; Subsidy; Cost sharing; Reward for performance; Corporate welfare; F12; O38; H25; F15;

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References

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  1. Debbie Opstal, 2010. "Commentary on Gregory Tassey’s “Rationales and mechanisms for revitalizing US manufacturing R&D strategies”," The Journal of Technology Transfer, Springer, vol. 35(3), pages 355-359, June.
  2. Takalo, Tuomas & Tanayama, Tanja, 2008. "Adverse selection and financing of innovation: is there a need for R&D subsidies?," Research Discussion Papers 19/2008, Bank of Finland.
  3. Gregory Tassey, 2007. "Tax incentives for innovation: time to restructure the R&E tax credit," The Journal of Technology Transfer, Springer, vol. 32(6), pages 605-615, December.
  4. Robert Atkinson, 2010. "Commentary on Gregory Tassey’s “Rationales and mechanisms for revitalizing US manufacturing R&D strategies”," The Journal of Technology Transfer, Springer, vol. 35(3), pages 334-338, June.
  5. Erkal, Nisvan & Piccinin, Daniel, 2010. "Cooperative R&D under uncertainty with free entry," International Journal of Industrial Organization, Elsevier, vol. 28(1), pages 74-85, January.
  6. Gretz Richard T & Highfill Jannett, 2010. "Recession, R&D Spending, and the Current Account: Bad News, Bad News, and a Little Encouragement," Global Economy Journal, De Gruyter, vol. 10(1), pages 1-8, February.
  7. Gregory Tassey, 2010. "Rationales and mechanisms for revitalizing US manufacturing R&D strategies," The Journal of Technology Transfer, Springer, vol. 35(3), pages 283-333, June.
  8. Gregory Tassey, 2005. "Underinvestment in Public Good Technologies," The Journal of Technology Transfer, Springer, vol. 30(2_2), pages 89-113, 01.
  9. Christopher Hill, 2010. "Commentary on Gregory Tassey’s “Rationales and mechanisms for revitalizing US manufacturing R&D strategies”," The Journal of Technology Transfer, Springer, vol. 35(3), pages 346-350, June.
  10. G. Swann, 2010. "Commentary on Gregory Tassey’s “Rationales and mechanisms for revitalizing US manufacturing R&D strategies”," The Journal of Technology Transfer, Springer, vol. 35(3), pages 351-354, June.
  11. Haruyama, Tetsugen, 2009. "R&D policy in a volatile economy," Journal of Economic Dynamics and Control, Elsevier, vol. 33(10), pages 1761-1778, October.
  12. Praveen Kujal & Juan M. Ruiz, 2009. "International Trade Policy towards Monopoly and Oligopoly," Review of International Economics, Wiley Blackwell, vol. 17(3), pages 461-475, 08.
  13. Dirk Czarnitzki & Andrew Toole, 2007. "Business R&D and the Interplay of R&D Subsidies and Product Market Uncertainty," Review of Industrial Organization, Springer, vol. 31(3), pages 169-181, November.
  14. Richard T. Gretz & Jannett Highfill & Robert C. Scott, 2009. "Strategic Research And Development Policy: Societal Objectives And The Corporate Welfare Argument," Contemporary Economic Policy, Western Economic Association International, vol. 27(1), pages 28-45, 01.
  15. Christopher Laincz, 2009. "R&D subsidies in a model of growth with dynamic market structure," Journal of Evolutionary Economics, Springer, vol. 19(5), pages 643-673, October.
  16. Richard T. Gretz & Joshua J. Lewer & Robert C. Scott, 2010. "R&D, Risk, and the Role of Targeted Government R&D Programs," The Journal of Economics, Missouri Valley Economic Association, vol. 36(1), pages 79-104.
  17. Eren Inci, 2009. "R&D tax incentives: a reappraisal," International Tax and Public Finance, Springer, vol. 16(6), pages 797-821, December.
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Cited by:
  1. Jannett Highfill & Michael McAsey, 2013. "Welfare Measures in Dynamic Firm R&D Games," International Advances in Economic Research, Springer, vol. 19(4), pages 439-449, November.
  2. Jannett Highfill & Michael McAsey, 2013. "Dynamic Firm R&D Games: Manufacturing Costs and Reliability Paths," Review of Economics & Finance, Better Advances Press, Canada, vol. 3, pages 1-14, February.

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