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Pros and Cons of ‘Backing Winners’ in Innovation Policy

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  • Frank A.G. den Butter

    (VU University Amsterdam)

  • Seung-gyu Jo

    (VU University Amsterdam)

Abstract

In the economics profession there is a fierce debate whether industrial and innovation policy should be targeted to specific sectors or firms. This paper discusses the welfare effects of such targeted policies from the perspective of strategic game theory of the firm. A theoretical case for picking winners through a preferential innovative policy is discussed in a third-market international trade model, which is shown to hold without evoking retaliation from foreign competitors. However, in practice information uncertainties remain a concern. The question whether in this case ‘backing winners’ is a wise policy option depends on the characteristics of the information asymmetries and on the extent the government is able to design selection procedures which minimize the transaction costs that may be caused from the market participants’ opportunistic behavior.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 09-012/3.

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Date of creation: 17 Feb 2009
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Handle: RePEc:dgr:uvatin:20090012

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Keywords: Innovation policy; R&D subsidies; strategic trade policy; asymmetric information; spill-over effects;

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  1. Jonathan Eaton & Gene M. Grossman, 1983. "Optimal Trade and Industrial Policy Under Oligopoly," NBER Working Papers 1236, National Bureau of Economic Research, Inc.
  2. Bergstrom, Theodore C. & Varian, Hal R., 1985. "Two remarks on Cournot equilibria," Economics Letters, Elsevier, Elsevier, vol. 19(1), pages 5-8.
  3. Brander, James A. & Spencer, Barbara J., 1985. "Export subsidies and international market share rivalry," Journal of International Economics, Elsevier, Elsevier, vol. 18(1-2), pages 83-100, February.
  4. Neary, J.P., 1999. "R&D in Developing Countries: What Should Governments Do?," Papers, College Dublin, Department of Political Economy- 99/27, College Dublin, Department of Political Economy-.
  5. Yordying Supasri & Makoto Tawada, 2007. "Endogenous Timing in a Strategic Trade Policy Game: A Two-Country Oligopoly Model with Multiple Firms," Review of Development Economics, Wiley Blackwell, Wiley Blackwell, vol. 11(2), pages 275-290, 05.
  6. James A. Brander & Barbara J. Spencer, 1983. "Strategic Commitment with R&D: The Symmetric Case," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 14(1), pages 225-235, Spring.
  7. Bas Jacobs & Jules Theeuwes, 2005. "Innovation in the Netherlands: the Market Falters and the Government Fails," De Economist, Springer, Springer, vol. 153(1), pages 107-124, December.
  8. Greg Shaffer & Stephen W. Salant, 1999. "Unequal Treatment of Identical Agents in Cournot Equilibrium," American Economic Review, American Economic Association, American Economic Association, vol. 89(3), pages 585-604, June.
  9. Neary, J Peter, 1991. "Cost Asymmetries in International Subsidy Games: Should Governments Help Winners or Losers?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 560, C.E.P.R. Discussion Papers.
  10. Gruenspecht, Howard K., 1988. "Export subsidies for differentiated products," Journal of International Economics, Elsevier, Elsevier, vol. 24(3-4), pages 331-344, May.
  11. Qui, Larry D., 1994. "Optimal strategic trade policy under asymmetric information," Journal of International Economics, Elsevier, Elsevier, vol. 36(3-4), pages 333-354, May.
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