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Pros and Cons of Backing Winners in Innovation Policy

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Author Info
Jo, Seung-gyu
den Butter, Frank A. G.
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 in a third-market international trade model under imperfect competition. A theoretical case for picking winners through a preferential innovation policy is discussed, 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 in a way to minimize the transaction costs that may be caused from the market participants’ opportunistic behavior.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 17658.

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Date of creation: Feb 2009
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Handle: RePEc:pra:mprapa:17658

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

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

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  1. Qui, Larry D., 1994. "Optimal strategic trade policy under asymmetric information," Journal of International Economics, Elsevier, vol. 36(3-4), pages 333-354, May. [Downloadable!] (restricted)
  2. Bas Jacobs & Jules Theeuwes, 2005. "Innovation in the Netherlands: the Market Falters and the Government Fails," De Economist, Springer, vol. 153(1), pages 107-124, December. [Downloadable!] (restricted)
  3. Neary, J. Peter, 1994. "Cost asymmetries in international subsidy games: Should governments help winners or losers?," Journal of International Economics, Elsevier, vol. 37(3-4), pages 197-218, November. [Downloadable!] (restricted)
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  4. Yordying Supasri & Makoto Tawada, 2007. "Endogenous Timing in a Strategic Trade Policy Game: A Two-Country Oligopoly Model with Multiple Firms," Review of Development Economics, Blackwell Publishing, vol. 11(2), pages 275-290, 05. [Downloadable!] (restricted)
  5. Gruenspecht, Howard K., 1988. "Export subsidies for differentiated products," Journal of International Economics, Elsevier, vol. 24(3-4), pages 331-344, May. [Downloadable!] (restricted)
  6. Eaton, Jonathan & Grossman, Gene M, 1986. "Optimal Trade and Industrial Policy under Oligopoly," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 383-406, May. [Downloadable!] (restricted)
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  7. Stephen W. Salant & Greg Shaffer, 1999. "Unequal Treatment of Identical Agents in Cournot Equilibrium," American Economic Review, American Economic Association, vol. 89(3), pages 585-604, June. [Downloadable!] (restricted)
  8. James A. Brander & Barbara J. Spencer, 1983. "Strategic Commitment with R&D: The Symmetric Case," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 225-235, Spring. [Downloadable!] (restricted)
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  9. J.P. Neary, 2000. "R&D in Developing Countries: What Should Governments Do?," CEP Discussion Papers dp0464, Centre for Economic Performance, LSE. [Downloadable!]
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