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Sunk costs, extensive R&D subsidies and permanent inducement effects

Author

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  • Pere Arqué-Castells

    (Universitat Autònoma de Barcelona & Institut d’Economia de Barcelona, Facultat d'Economia i Empresa, Edifici B - Campus de la Universitat Autònoma de Barcelona, 08193, Bellaterra - Barcelona, Spain)

  • Pierre Mohnen

    (University of Maastricht, UNU-MERIT, P.O. Box 616, 6200 MD, Maastricht, The Netherlands)

Abstract

We study whether there is scope for using subsidies to smooth out barriers to R&D performance and expand the share of R&D firms in Spain. We consider a dynamic model with sunk entry costs in which firms’ optimal participation strategy is defined in terms of two subsidy thresholds that characterise entry and continuation. We compute the subsidy thresholds from the estimates of a dynamic panel data type-2 tobit model for an unbalanced panel of about 2,000 Spanish manufacturing firms. The results suggest that “extensive” subsidies are a feasible and efficient tool for expanding the share of R&D firms.

Suggested Citation

  • Pere Arqué-Castells & Pierre Mohnen, 2012. "Sunk costs, extensive R&D subsidies and permanent inducement effects," Working Papers XREAP2012-10, Xarxa de Referència en Economia Aplicada (XREAP), revised May 2012.
    • Handle: RePEc:xrp:wpaper:xreap2012-10
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    More about this item

    Keywords

    R&D; Persistence; Subsidies; Dynamic models;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • O2 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • D2 - Microeconomics - - Production and Organizations

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