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Pros and Cons of ‘Backing Winners’ in Innovation Policy

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Author Info
Frank A.G. den Butter () (VU University Amsterdam)
Seung-gyu Jo () (VU University Amsterdam)

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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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Publisher 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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Web page: http://www.tinbergen.nl/

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

Find related papers by JEL classification:
C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
O24 - Economic Development, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy
O32 - Economic Development, Technological Change, and Growth - - Technological Change - - - Management of Technological Innovation and R&D

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This page was last updated on 2009-11-26.

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