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Interaction in R&D and the Case-by-Case Subsidy Rule

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  • David Horan

Abstract

This paper studies the performance of government subsidy programs which fund business R&D projects. A commonly used criterion for distributing funding is the case-by-case (CbC) rule. Under the rule, project funding is decided based on the gap between a project’s social and private return. This paper finds that in the presence of pervasive complementarity in R&D activities CbC funding is socially excessive. On the other hand, in the presence of pervasive substitutability in R&D activities CbC funding is socially insufficient. Since the situation can differ greatly from one industry to the next, these findings suggest governments may be over-funding research in some industries at the expense of research in other under-funded industries.

Suggested Citation

  • David Horan, 2010. "Interaction in R&D and the Case-by-Case Subsidy Rule," Economics Working Papers ECO2010/36, European University Institute.
    • Handle: RePEc:eui:euiwps:eco2010/38
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    More about this item

    Keywords

    R&D Subsidies; Interaction in R&D; Case-by-Case Subsidy Rule; Welfare;
    All these keywords.

    JEL classification:

    • H40 - Public Economics - - Publicly Provided Goods - - - General
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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