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Pros and Cons of Backing Winners in Innovation Policy

  • Jo, Seung-gyu
  • den Butter, Frank A. G.

In the economics profession there is a fierce debate whether industrial and innovation policy should be targeted to specific sectors or firms. This paper discusses the welfare effects of such targeted policies in a third-market international trade model under imperfect competition. A theoretical case for picking winners through a preferential innovation policy is discussed, which is shown to hold without evoking retaliation from foreign competitors. However, in practice information uncertainties remain a concern. The question whether in this case ‘backing winners’ is a wise policy option depends on the characteristics of the information asymmetries and on the extent the government is able to design selection procedures in a way to minimize the transaction costs that may be caused from the market participants’ opportunistic behavior.

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File URL: http://mpra.ub.uni-muenchen.de/17658/1/MPRA_paper_17658.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 17658.

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Date of creation: Feb 2009
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Handle: RePEc:pra:mprapa:17658
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  1. James A. Brander & Barbara J. Spencer, 1984. "Export Subsidies and International Market Share Rivalry," NBER Working Papers 1464, National Bureau of Economic Research, Inc.
  2. Bergstrom, Theodore C. & Varian, Hal R., 1985. "Two remarks on Cournot equilibria," Economics Letters, Elsevier, vol. 19(1), pages 5-8.
  3. Gruenspecht, Howard K., 1988. "Export subsidies for differentiated products," Journal of International Economics, Elsevier, vol. 24(3-4), pages 331-344, May.
  4. Barbara J. Spencer & James A. Brander, 1982. "Strategic Commitment with R&D: The Symmetric Case," Working Papers 516, Queen's University, Department of Economics.
  5. Neary, J. Peter, 1994. "Cost asymmetries in international subsidy games: Should governments help winners or losers?," Journal of International Economics, Elsevier, vol. 37(3-4), pages 197-218, November.
  6. Jonathan Eaton & Gene M. Grossman, 1983. "Optimal Trade and Industrial Policy Under Oligopoly," NBER Working Papers 1236, National Bureau of Economic Research, Inc.
  7. Bas Jacobs & Jules Theeuwes, 2005. "Innovation in the Netherlands: the Market Falters and the Government Fails," De Economist, Springer, vol. 153(1), pages 107-124, December.
  8. Yordying Supasri & Makoto Tawada, 2007. "Endogenous Timing in a Strategic Trade Policy Game: A Two-Country Oligopoly Model with Multiple Firms," Review of Development Economics, Wiley Blackwell, vol. 11(2), pages 275-290, 05.
  9. Greg Shaffer & Stephen W. Salant, 1999. "Unequal Treatment of Identical Agents in Cournot Equilibrium," American Economic Review, American Economic Association, vol. 89(3), pages 585-604, June.
  10. J.P. Neary, 2000. "R&D in Developing Countries: What Should Governments Do?," CEP Discussion Papers dp0464, Centre for Economic Performance, LSE.
  11. Qui, Larry D., 1994. "Optimal strategic trade policy under asymmetric information," Journal of International Economics, Elsevier, vol. 36(3-4), pages 333-354, May.
  12. Praveen Kujal & Juan Ruiz, 2007. "Cost effectiveness of R&D and strategic trade policy," Banco de Espa�a Working Papers 0701, Banco de Espa�a.
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