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A Politico-Economic Analysis of the European Union’s R&D Policy

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  • Chu, Angus C.

Abstract

This paper provides a politico-economic analysis of the European Union’s (EU) R&D policy. It develops an open-economy R&D-growth model characterized by two parameters that capture respectively the degree of technology spillover and the effectiveness of lobbying. In a non-cooperative equilibrium, each country chooses the level of R&D subsidy independently and fails to internalize technology spillover. Consequently, R&D subsidy is underprovided. In an economic union, the central government internalizes technology spillover but is vulnerable to lobbying by politicians from each country, who attempt to free-ride on the central government budget. Consequently, R&D subsidy is overprovided; however, this overprovision becomes less severe as the degree of technology spillover increases. Therefore, technology spillover has a surprisingly positive effect on welfare in an economic union. As for the effect on relative welfare, there is a cutoff value for the degree of technology spillover such that if and only if spillover is above this threshold, then an economic union dominates independent countries in welfare. Furthermore, this threshold is an increasing function in the effectiveness of lobbying. This paper also considers the possibility that the EU faces a binding budget ceiling. In this case, lobbying on R&D subsidy exerts a distortionary effect on revenue allocation, and hence a welfare loss continues to exist.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 10329.

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Date of creation: Jul 2008
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Handle: RePEc:pra:mprapa:10329

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Keywords: endogenous growth; policy coordination; lobbying; R&D subsidy;

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  1. Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 527, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Angus C. Chu, 2008. "Special Interest Politics And Intellectual Property Rights: An Economic Analysis Of Strengthening Patent Protection In The Pharmaceutical Industry," Economics and Politics, Wiley Blackwell, Wiley Blackwell, vol. 20(2), pages 185-215, 06.
  3. Bradbury, John Charles & Crain, W. Mark, 2001. "Legislative organization and government spending: cross-country evidence," Journal of Public Economics, Elsevier, Elsevier, vol. 82(3), pages 309-325, December.
  4. Jonathan Eaton & Eva Gutierrez & Samuel Kortum, 1998. "European Technology Policy," Boston University - Institute for Economic Development, Boston University, Institute for Economic Development 87, Boston University, Institute for Economic Development.
  5. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
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