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Government Preference and the Optimal Choice of R&D Subsidy Policy: Innovation Subsidy or Product Subsidy?

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  • Yongcong Yang

Abstract

Taking government preference into consideration, we consider a three‐stage game model to compare the differences of innovation subsidy and product subsidy. The findings reveal that stronger preference to consumers’ welfare leads to higher subsidy rates, which benefit not only consumers but also firms. To choose between the two subsidies, the optimal choice varies with the changing preference of policymakers. According to the results of numerical simulation, product subsidy is better than innovation subsidy in most cases, while the government’s expenditure of the former one is larger than the latter one. Moreover, subsidizing firms symmetrically and asymmetrically has different effects on the consequences.

Suggested Citation

  • Yongcong Yang, 2014. "Government Preference and the Optimal Choice of R&D Subsidy Policy: Innovation Subsidy or Product Subsidy?," Journal of Applied Mathematics, John Wiley & Sons, vol. 2014(1).
    • Handle: RePEc:wly:jnljam:v:2014:y:2014:i:1:n:536370
    DOI: 10.1155/2014/536370
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    References listed on IDEAS

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    2. Xulia González & Jordi Jaumandreu & Consuelo Pazo, 2005. "Barriers to Innovation and Subsidy Effectiveness," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 930-949, Winter.
    3. Benjamin Montmartin, 2010. "Subsidy Policy for Innovation : A way to reach objectives of both higher growth and equity ?," Working Papers 1031, Groupe d'Analyse et de Théorie Economique Lyon St-Etienne (GATE Lyon St-Etienne), Université de Lyon.
    4. You-hua Chen & Pu-yan Nie & X. Henry Wang, 2013. "On the Relationship between Competition and Innovation in a Duopoly with a Single Innovator," Economics Bulletin, AccessEcon, vol. 33(4), pages 2648-2660.
    5. Saracho, Ana Isabel & Usategui, JoseMaria, 1994. "Innovation diffusion subsidies: Supply without precommitment ability and welfare," European Journal of Political Economy, Elsevier, vol. 10(2), pages 357-372, July.
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