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Cooperative and Non-Cooperative R&D Policy in an Economic Union

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  • Haaland, Jan I.
  • Kind, Hans Jarle

Abstract

Should R&D policies within an economic union be centralized or decentralized to each individual country? Do non-cooperative policies - typically implying policy competition between countries - always give rise to too high R&D subsidies in a decentralized policy regime? Should small countries subsidize R&D more than larger countries? To address such questions, we construct a simple model with horizontally differentiated consumer goods, where each firm may invest in quality-improving R&D. Assuming that the goods are produced in different countries within an economic union, we compare non-cooperative and cooperative R&D policies. We show that non-cooperative policies imply too small R&D subsidies for horizontally differentiated goods and too high subsidies for goods that are close substitutes. Furthermore, small, net exporting countries of R&D intensive goods have fewer incentives to subsidize R&D than large countries, resulting in an unwarranted vertical product differentiation between goods produced in different countries. Coordination of R&D policies at the union level helps overcome some of these problems. If only a subset of countries cooperate, however, union welfare may be lower than if there is no R&D cooperation at all.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4185.

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Date of creation: Jan 2004
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Handle: RePEc:cpr:ceprdp:4185

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Keywords: economic union; policy game; R&D;

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References

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  1. J. Peter Neary & Dermot Leahy, 1998. "Strategic trade and industrial policy towards dynamic oligopolies," LSE Research Online Documents on Economics 20246, London School of Economics and Political Science, LSE Library.
  2. Dermot Leahy & J. Peter Neary, 2000. "Robust Rules for Industrial Policy in open Economies," Working Papers 200021, School Of Economics, University College Dublin.
  3. Leahy, Dermot & Neary, J Peter, 1997. "Public Policy towards R&D in Oligopolistic Industries," American Economic Review, American Economic Association, vol. 87(4), pages 642-62, September.
  4. Kyle Bagwell & Robert W. Staiger, 1989. "The Sensitivity of Strategic and Corrective R&D Policy in Oligopolistic Industries," Discussion Papers 869, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. James A. Brander, 1995. "Strategic Trade Policy," NBER Working Papers 5020, National Bureau of Economic Research, Inc.
  6. Collie, David R., 2000. "State aid in the European Union: The prohibition of subsidies in an integrated market," International Journal of Industrial Organization, Elsevier, vol. 18(6), pages 867-884, August.
  7. Jee-Hyeong Park, 2001. "Strategic R&D policy under vertically differentiated oligopoly," Canadian Journal of Economics, Canadian Economics Association, vol. 34(4), pages 967-987, November.
  8. d'Aspremont, Claude & Jacquemin, Alexis, 1988. "Cooperative and Noncooperative R&D in Duopoly with Spillovers," American Economic Review, American Economic Association, vol. 78(5), pages 1133-37, December.
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Cited by:
  1. Dermot Leahy & J. Peter Neary, 2010. "Oligopoly And Trade," Economics, Finance and Accounting Department Working Paper Series n215-10.pdf, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  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.
  3. Peter Neary & Dermot Leahy, 2007. "Multilateral Subsidy Games," Economics Series Working Papers 346, University of Oxford, Department of Economics.
  4. Rod Falvey & Khemarat Talerngsri Teerasuwannajak, . "Competitive and Harmonised R&D Policies for International R&D Alliances involving Asymmetric Firms," Discussion Papers 12/03, University of Nottingham, GEP.
  5. Arias-Aranda, Daniel & Romerosa-Martínez, M. Mercedes, 2010. "Innovation in the functional foods industry in a peripheral region of the European Union: Andalusia (Spain)," Food Policy, Elsevier, vol. 35(3), pages 240-246, June.
  6. Giammario Impullitti, 2007. "International Schumpeterian Competition and Optimal R&D subsidies," Economics Working Papers ECO2007/55, European University Institute.

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