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Subsidizing Public Inputs

  • Neil Buckley
  • Stuart Mestelman
  • Mohamed Shehata

Investment in research and development may (with some probability) lead to reductions in a firm’s production cost. If the production-cost savings associated with successful research and development is freely disseminated to other firms as soon as it is realized, too few resources may be allocated to this input. In such an environment, subsidies to the public input can lead to optimal input use. Four alternative subsidy instruments are considered in this paper. Two are incremental subsidies and the others are conventional level subsidies. One of the incremental subsidies and one of the level subsidies crudely capture characteristics of incentive mechanisms used in the United States and Canada. A laboratory implementation of these instruments generally confirms that incremental subsidies are inferior to level subsidies.

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File URL: http://socserv.socsci.mcmaster.ca/econ/rsrch/papers/archive/99-11.pdf
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Paper provided by McMaster University in its series Department of Economics Working Papers with number 1999-11.

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Length: 66 pages
Date of creation: Nov 1999
Date of revision:
Handle: RePEc:mcm:deptwp:1999-11
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  1. Jeffrey I. Bernstein, 1996. "International R&D Spillovers between Industries in Canada and the United States, Social Rates of Return and Productivity Growth," Canadian Journal of Economics, Canadian Economics Association, vol. 29(s1), pages 463-67, April.
  2. Glenn C. Loury, 1976. "Market Structure and Innovation," Discussion Papers 256, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Jon Vilasuso & Mark R. Frascatore, 2000. "Public policy and R&D when research joint ventures are costly," Canadian Journal of Economics, Canadian Economics Association, vol. 33(3), pages 818-839, August.
  4. Isaac, R Mark & Reynolds, Stanley S, 1988. "Appropriability and Market Structure in a Stochastic Invention Model," The Quarterly Journal of Economics, MIT Press, vol. 103(4), pages 647-71, November.
  5. Davis, Jon & Quirmbach, Herman & Swenson, Charles, 1995. "Income Tax Subsidies and Research and Development Spending in a Competitive Economy: An Experimental Study," Staff General Research Papers 5215, Iowa State University, Department of Economics.
  6. Hughes, Edward & McFetridge, D. G., 1985. "A theoretical analysis of incremental investment incentives with an application to the case of industrial R & D," Journal of Public Economics, Elsevier, vol. 27(3), pages 311-329, August.
  7. Isaac, R. Mark & Reynolds, Stanley S., 1992. "Schumpeterian competition in experimental markets," Journal of Economic Behavior & Organization, Elsevier, vol. 17(1), pages 59-100, January.
  8. Offerman, Theo & Sonnemans, Joep & Schram, Arthur, 1996. "Value Orientations, Expectations and Voluntary Contributions in Public Goods," Economic Journal, Royal Economic Society, vol. 106(437), pages 817-45, July.
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