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Are R&D Subsidies Provided Optimally? Evidence from a Simulated Agency-Firm Stochastic Dynamic Game

By means of a simulated funding-agency/supported-firm stochastic dynamic game, this paper shows that the level of the subsidy provided by a funding (public) agency, normally used to correct for firm R&D shortage, might be severely underprovided. This is due to the "externalities" generated by the agency-firm strategic relationship, as showed by comparing two versions of the model: one assuming "rival" behaviors between companies and agency (i.e., the current setting), and one associated to the "cooperative" strategy (i.e. the optimal Pareto-efficient benchmark). The paper looks also at what "welfare" implications are associated to different degrees of persistency in the funding effect on corporate R&D. Three main conclusions are thus drawn: (i) the relative quota of the subsidy to R&D is undersized in the rival compared to the cooperative model; (ii) the rivalry strategy generates distortions that favor the agency compared to firms; (iii) when passing from less persistent to more persistent R&D additionality/crowding-out effect, the lower the distortion the greater the variance is and vice versa. As for the management of R&D funding policies, we suggest that all the elements favouring greater collaboration between agency and firm objectives may help current R&D support to approach its social optimum.

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File URL: http://jasss.soc.surrey.ac.uk/15/1/7/7.pdf
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Article provided by Journal of Artificial Societies and Social Simulation in its journal Journal of Artificial Societies and Social Simulation.

Volume (Year): 15 (2012)
Issue (Month): 1 ()
Pages: 7

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Handle: RePEc:jas:jasssj:2011-1-3
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