Subsidizing Public Inputs
AbstractInvestment in research and development may (with some probability) lead to reductions in a firm’s production cost. If the production-cost savings associated with successful research and development is freely disseminated to other firms as soon as it is realized, too few resources may be allocated to this input. In such an environment, subsidies to the public input can lead to optimal input use. Four alternative subsidy instruments are considered in this paper. Two are incremental subsidies and the others are conventional level subsidies. One of the incremental subsidies and one of the level subsidies crudely capture characteristics of incentive mechanisms used in the United States and Canada. A laboratory implementation of these instruments generally confirms that incremental subsidies are inferior to level subsidies.
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Bibliographic InfoPaper provided by McMaster University in its series Department of Economics Working Papers with number 1999-11.
Length: 66 pages
Date of creation: Nov 1999
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