Subsidies, Entry and the Distribution of R&D Investment
AbstractWe analyze the link between entry and R&D spending distribution. We consider a monopolistic competitive market with free entry in which firms can invest in cost-cutting R&D by paying a fixed cost first. For an intermediate level of fixed cost, there is a unique equilibrium in which the market segments into investing and non-investing firms. We show that the measure of R&D investing firms decreases as entry occurs. Using this result, we show how alternative government policies affect the R&D spending distribution. In particular, we characterize the cases in which incentives to promote R&D spending can result in exit. We show that while subsidy to entry may be welfare neutral from the consumers' point of view, R&D subsidies, despite promoting exit sometimes, are always welfare improving. Data motivating these results are drawn from the Taiwanese and Korean semiconductor industries.
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Bibliographic InfoPaper provided by New York University, Leonard N. Stern School of Business, Department of Economics in its series Working Papers with number 08-5.
Date of creation: 2008
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Postal: New York University, Leonard N. Stern School of Business, Department of Economics, 44 West 4th Street, New York, NY 10012-1126
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Other versions of this item:
- Asker, John & Baccara, Mariagiovanna, 2010. "Subsidies, entry and the distribution of R&D investment," International Journal of Industrial Organization, Elsevier, vol. 28(3), pages 254-270, May.
- John Asker & Mariagiovanna Baccara, 2009. "Subsidies, Entry and the Distribution of R&D Investment," Working Papers 09-10, New York University, Leonard N. Stern School of Business, Department of Economics.
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-03-15 (All new papers)
- NEP-IND-2008-03-15 (Industrial Organization)
- NEP-MIC-2008-03-15 (Microeconomics)
- NEP-TID-2008-03-15 (Technology & Industrial Dynamics)
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