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Patents versus Subsidies – A Laboratory Experiment

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Author Info
Donja Darai () (Socioeconomic Institute, University of Zurich)
Jens Grosser () (Departments of Political Science and Economics, Florida State University)
Nadja Trhal () (Economics Department, University of Cologne)

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Abstract

This paper studies the effects of patents and subsidies on R&D investment decisions. The theoretical framework is a two-stage game consisting of an investment and a market stage. In equilibrium, both patents and subsidies induce the same amount of R&D investment, which is higher than the investment without governmental incentives. In the first stage, the firms can invest in a stochastic R&D project which might lead to a reduction of the marginal production costs and in the second stage, the firms face price competition. Both stages of the game are implemented in a laboratory experiment and the obtained results support the theoretical predictions. Patents and subsidies increase investment in R&D and the observed amounts of investment in the patent and subsidy treatment do not differ significantly across both instruments. However, we observe overinvestment in all three treatments. Observed prices in the market stage converge to equilibrium price levels.

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Paper provided by University of Zurich, Socioeconomic Institute in its series Working Papers with number 0905.

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Length: 59 pages
Date of creation: Mar 2009
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Handle: RePEc:soz:wpaper:0905

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Related research
Keywords: R&D investment; oligopoly; patents; subsidies; experiment;

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Find related papers by JEL classification:
C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
O31 - Economic Development, Technological Change, and Growth - - Technological Change - - - Innovation and Invention: Processes and Incentives

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