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Conditional R&D Subsidies

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  • Atallah, Gamal

Abstract

This 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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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 2895.

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Date of creation: 2007
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Handle: RePEc:pra:mprapa:2895

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Keywords: R&D subsidies; Innovation; R&D policy; Innovation policy;

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  1. Miyagiwa, Kaz & Ohno, Yuka, 2002. "Uncertainty, spillovers, and cooperative R&D," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 20(6), pages 855-876, June.
  2. Karolina Ekholm & Johan Torstensson, 1997. "High-Technology Subsidies in General Equilibrium: A Sector-Specific Approach," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 30(4), pages 1184-1203, November.
  3. Lakdawalla, Darius & Sood, Neeraj, 2004. "Social insurance and the design of innovation incentives," Economics Letters, Elsevier, Elsevier, vol. 85(1), pages 57-61, October.
  4. Klette, Tor Jakob & Moen, Jarle & Griliches, Zvi, 2000. "Do subsidies to commercial R&D reduce market failures? Microeconometric evaluation studies1," Research Policy, Elsevier, Elsevier, vol. 29(4-5), pages 471-495, April.
  5. Petrakis, Emmanuel & Poyago-Theotoky, Joanna, 2002. "R&D Subsidies versus R&D Cooperation in a Duopoly with Spillovers and Pollution," Australian Economic Papers, Wiley Blackwell, Wiley Blackwell, vol. 41(1), pages 37-52, March.
  6. Klette, T.J. & Moen, J. & Griliches, Z., 1999. "Do Subsidies to Commercial R&D Reduce Market Failures? Microeconometric Evaluation Studies," Papers, Norwegian School of Economics and Business Administration- 16/99, Norwegian School of Economics and Business Administration-.
  7. Poyago-Theotoky, Joanna, 1998. "R&D Competition in a Mixed Duopoly under Uncertainty and Easy Imitation," Journal of Comparative Economics, Elsevier, vol. 26(3), pages 415-428, September.
  8. Martin, Stephen & Scott, John T., 2000. "The nature of innovation market failure and the design of public support for private innovation," Research Policy, Elsevier, Elsevier, vol. 29(4-5), pages 437-447, April.
  9. Isabel Busom, 2000. "An Empirical Evaluation of The Effects of R&D Subsidies," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 9(2), pages 111-148.
  10. Minoru Kitahara & Toshihiro Matsumura, 2006. "Realized Cost-Based Subsidies For Strategic R&D Investments With "Ex Ante" And "Ex Post" Asymmetries," The Japanese Economic Review, Japanese Economic Association, Japanese Economic Association, vol. 57(3), pages 438-448.
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