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Cooperative and Non-Cooperative R&D Policy in an Economic Union

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  • Jan Haaland

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  • Hans Jarle Kind

Abstract

Should R&D policies within an economic union be centralized or decentralized to each individual country? Do non-cooperative policies - typically implying policy competition between countries - always give rise to too high R&D subsidies in a decentralized policy regime? Should small countries subsidize R&D more than larger countries? To address such questions, we construct a simple model with horizontally differentiated consumer goods, where each firm may invest in quality-improving R&D. Assuming that the goods are produced in different countries within an economic union, we compare non-cooperative and cooperative R&D policies. We show that non-cooperative policies imply too small R&D subsidies for horizontally differentiated goods and too high subsidies for goods that are close substitutes. Furthermore, small, net exporting countries of R&D intensive goods have fewer incentives to subsidize R&D than large countries, resulting in an unwarranted vertical product differentiation between goods produced in different countries. Coordination of R&D policies at the union level helps overcome some of these problems. If only a subset of countries cooperate, however, union welfare may be lower than if there is no R&D cooperation at all.
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Suggested Citation

  • Jan Haaland & Hans Jarle Kind, 2006. "Cooperative and Non-Cooperative R&D Policy in an Economic Union," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 142(4), pages 720-745, December.
  • Handle: RePEc:spr:weltar:v:142:y:2006:i:4:p:720-745 DOI: 10.1007/s10290-006-0090-8
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    References listed on IDEAS

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    1. d'Aspremont, Claude & Jacquemin, Alexis, 1988. "Cooperative and Noncooperative R&D in Duopoly with Spillovers," American Economic Review, American Economic Association, pages 1133-1137.
    2. Neary, J Peter & Leahy, Dermot, 2000. "Strategic Trade and Industrial Policy towards Dynamic Oligopolies," Economic Journal, Royal Economic Society, vol. 110(463), pages 484-508, April.
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    4. Leahy, Dermot & Neary, J Peter, 2001. "Robust Rules for Industrial Policy in Open Economies," CEPR Discussion Papers 2731, C.E.P.R. Discussion Papers.
    5. Bagwell, Kyle & Staiger, Robert W., 1994. "The sensitivity of strategic and corrective R&D policy in oligopolistic industries," Journal of International Economics, Elsevier, pages 133-150.
    6. Jee-Hyeong Park, 2001. "Strategic R&D policy under vertically differentiated oligopoly," Canadian Journal of Economics, Canadian Economics Association, vol. 34(4), pages 967-987, November.
    7. d'Aspremont, Claude & Jacquemin, Alexis, 1988. "Cooperative and Noncooperative R&D in Duopoly with Spillovers," American Economic Review, American Economic Association, pages 1133-1137.
    8. Brander, James A., 1995. "Strategic trade policy," Handbook of International Economics,in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 27, pages 1395-1455 Elsevier.
    9. Collie, David R., 2000. "State aid in the European Union: The prohibition of subsidies in an integrated market," International Journal of Industrial Organization, Elsevier, vol. 18(6), pages 867-884, August.
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    Citations

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    Cited by:

    1. Dermot Leahy & J. Peter Neary, 2010. "Oligopoly And Trade," Economics, Finance and Accounting Department Working Paper Series n215-10.pdf, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
    2. Rod Falvey & Khemarat Talerngsri Teerasuwannajak, 2016. "Competitive and Harmonized R&D Policies for International R&D Alliances involving Asymmetric Firms," Review of International Economics, Wiley Blackwell, vol. 24(2), pages 302-329, May.
    3. Giammario Impullitti, 2007. "International Schumpeterian Competition and Optimal R&D subsidies," Economics Working Papers ECO2007/55, European University Institute.
    4. Alvaro Cuervo-Cazurra & C. Annique Un, 2011. "Economic Integration and the Technological Capabilities of Domestic Firms," Chapters,in: International Handbook on the Economics of Integration, Volume II, chapter 4 Edward Elgar Publishing.
    5. Arias-Aranda, Daniel & Romerosa-Martínez, M. Mercedes, 2010. "Innovation in the functional foods industry in a peripheral region of the European Union: Andalusia (Spain)," Food Policy, Elsevier, vol. 35(3), pages 240-246, June.
    6. repec:kap:iaecre:v:19:y:2013:i:4:p:439-449 is not listed on IDEAS
    7. Jannett Highfill & Michael McAsey, 2013. "Welfare Measures in Dynamic Firm R&D Games," International Advances in Economic Research, Springer;International Atlantic Economic Society, pages 439-449.
    8. Haaland, Jan I. & Kind, Hans Jarle, 2008. "R&D policies, trade and process innovation," Journal of International Economics, Elsevier, pages 170-187.
    9. Ya-Chin Wang, 2016. "R&D Policy Involving Consumer-Friendly Strategy: Cooperative and Non-Cooperative R&D," Journal of Industry, Competition and Trade, Springer, vol. 16(2), pages 257-272, June.
    10. Dermot Leahy & J. Neary, 2009. "Multilateral subsidy games," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 41-66.
    11. Jannett Highfill & Michael McAsey, 2013. "Dynamic Firm R&D Games: Manufacturing Costs and Reliability Paths," Review of Economics & Finance, Better Advances Press, Canada, vol. 3, pages 1-14, February.

    More about this item

    Keywords

    Trade; R&D; subsidies; economic union;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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