State aid to investment and R&D
AbstractThe prohibition of state aid to investment and R&D in an integrated market such as the European Community is analysed in a Cournot oligopoly model where firms undertake investment or R&D to reduce their costs. Both strategic and non-strategic investment and R&D are considered. Governments in the Member States give subsidies for investment and R&D, which are financed by distortionary taxation so the opportunity cost of government revenue exceeds unity. Prohibiting state aid to investment will always increase aggregate welfare. Prohibiting state aid to R&D will always increase aggregate welfare if spillovers from R&D are small. If spillovers from R&D are moderate then there exists a range of values for opportunity cost where governments give state aid and where the prohibition of state aid will increase aggregate welfare. Prohibiting state aid to R&D will reduce aggregate welfare if spillovers from R&D are large.
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Bibliographic InfoPaper provided by Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 231.
Length: 14 pages
Date of creation: Jul 2005
Date of revision:
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State aid prohibition; Cournot oligopoly model; R&D spillovers; distortionary taxation; Collie; R&D; research and development;
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