Conditional R&D Subsidies
AbstractThis paper introduces a new type of R&D subsidy, which is conditional on the success of the R&D project. In a three-stage model, the government chooses a subsidy(ies) in the first stage; in the second stage, a monopolist chooses R&D effort which determines the size or the probability of success of the R&D project; in the last stage, the firm chooses its output. It is found that conditional subsidies can yield the same level of innovation and welfare as unconditional subsidies. However, when the probability of success is sufficiently low (be it endogenous or exogenous), conditional subsidies yield suboptimal levels of innovation and welfare. When the firm chooses the probability of success, conditional subsidies can have the advantage of a lower expected cost of the subsidy to the government. I consider the simultaneous use of conditional and unconditional subsidies, and show that different combinations of the two can lead to the same levels of innovation and welfare as unconditional subsidies alone. Finally, reverse conditional subsidies, which the firm gets only if the project fails, are considered. It is found that they yield the same level of innovation as unconditional subsidies, except when the probability of success is sufficiently high. Comparing conditional subsidies with reverse conditional subsidies, conditional subsidies yield higher (lower) welfare when the probability of success is high (low).
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 2895.
Date of creation: 2007
Date of revision:
R&D subsidies; Innovation; R&D policy; Innovation policy;
Other versions of this item:
- Gamal Atallah, 2007. "Conditional R&D Subsidies," Working Papers, University of Ottawa, Department of Economics 0702E, University of Ottawa, Department of Economics.
- O38 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Government Policy
- O31 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-04-28 (All new papers)
- NEP-INO-2007-04-28 (Innovation)
- NEP-MIC-2007-04-28 (Microeconomics)
- NEP-PPM-2007-04-28 (Project, Program & Portfolio Management)
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