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State aid to investment and R&D

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  • David R Collie

Abstract

The prohibition of state aid to investment and R&D in an integrated market such as the European Community is analysed in a Cournot oligopoly model where firms undertake investment or R&D to reduce their costs. Both strategic and non-strategic investment and R&D are considered. Governments in the Member States give subsidies for investment and R&D, which are financed by distortionary taxation so the opportunity cost of government revenue exceeds unity. Prohibiting state aid to investment will always increase aggregate welfare. Prohibiting state aid to R&D will always increase aggregate welfare if spillovers from R&D are small. If spillovers from R&D are moderate then there exists a range of values for opportunity cost where governments give state aid and where the prohibition of state aid will increase aggregate welfare. Prohibiting state aid to R&D will reduce aggregate welfare if spillovers from R&D are large.

Suggested Citation

  • David R Collie, 2005. "State aid to investment and R&D," European Economy - Economic Papers 2008 - 2015 231, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  • Handle: RePEc:euf:ecopap:0231
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Hanke, Philip & Philip, Hanke & Klaus, Heine, 2016. "The firm location race – Regulating incentive packages given to firms by local and regional governments," Annual Conference 2016 (Augsburg): Demographic Change 145862, Verein für Socialpolitik / German Economic Association.
    2. 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.
    3. Martin Gregor & Dalibor Roháč, 2009. "The Optimal State Aid Control: No Control," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 3(1), pages 093-113, March.
    4. Fatih Cemil ÖZBUĞDAY & Erik BROUWER, 2016. "Measuring the Extent of European State Aid Control: An Econometric Analysis of the European Commission Decisions," Sosyoekonomi Journal, Sosyoekonomi Society, issue 24(30).
    5. Rajeev K. Goel & Shoji Haruna, 2011. "Cost-Reducing R&D with Spillovers and Trade," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 167(2), pages 314-326, June.
    6. Dermot Leahy & J. Neary, 2009. "Multilateral subsidy games," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 41-66.
    7. Hertweck Matthias Sebastian, 2013. "Strategic wage bargaining, labor market volatility, and persistence," The B.E. Journal of Macroeconomics, De Gruyter, pages 1-27.
    8. George STEFAN & Raluca Andreea POPA & Alina ARSANI, 2016. "The Evolution Of State Aid In Romania. Analysis Of The Automotive Sector 2007-2015," Scientific Bulletin - Economic Sciences, University of Pitesti, vol. 15(2), pages 77-92.

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