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

  • Haaland, Jan I.
  • Kind, Hans Jarle

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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4185.

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Date of creation: Jan 2004
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Handle: RePEc:cpr:ceprdp:4185
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  1. D Leahy & J.P. Neary, 1995. "Public Policy Towards R&D in Oligopolistic Industries," CEP Discussion Papers dp0270, Centre for Economic Performance, LSE.
  2. d'ASPREMONT, Claude & JACQUEMIN, Alexis, . "Cooperative and noncooperative R&D in duopoly with spillovers," CORE Discussion Papers RP -823, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. 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.
  4. 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.
  5. Dermot Leahy & J. Peter Neary, 2000. "Robust Rules for Industrial Policy in open Economies," Working Papers 200021, School Of Economics, University College Dublin.
  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. Kyle Bagwell & Robert W. Staiger, 1989. "The Sensitivity of Strategic and Corrective R&D Policy in Oligopolistic Industries," Discussion Papers 869, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. J. Peter Neary & Dermot Leahy, 1998. "Strategic trade and industrial policy towards dynamic oligopolies," LSE Research Online Documents on Economics 20246, London School of Economics and Political Science, LSE Library.
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