Optimal R&D Subsidies with Heterogeneous Firms in a Dynamic Setting
When firms engaged in R&D are observably heterogeneous (in size) and policymakers are able to condition policy on the observed heterogeneity, what is the optimal policy? This paper starts with a static two-stage duopoly model of R&D competition with uncertainty and finds it welfare enhancing to subsidize the larger firms, with no subsidies for (or taxes on) the smaller firm (extending existing results, Lahiri and Ono, 1999). This result follows because marginal cost reductions by the largest firm have larger net effects on consumer and producer surplus. The policymaker's goal is effectively to minimize the average cost of production. However, when we move to a dynamic setting, the optimal policy is less clear. When firms compete repeatedly, the degree of competition becomes an endogenous variable over the infinite horizon. The optimal policy depends on the nature of long-run competition. In some situations, the optimal policy remains the same, subsidize the larger firm. However, in other scenarios, the policymaker optimally chooses to subsidize the smaller firm more heavily to promote more intense competition which lowers the long-run deadweight loss and long run costs through increased R&D competition.
|Date of creation:||26 Jun 2012|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.lebow.drexel.edu/|
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Richard C. Levin & Peter C. Reiss, 1988. "Cost-Reducing and Demand-Creating R&D with Spillovers," RAND Journal of Economics, The RAND Corporation, vol. 19(4), pages 538-556, Winter.
- 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).
- d'Aspremont, Claude & Jacquemin, Alexis, 1988. "Cooperative and Noncooperative R&D in Duopoly with Spillovers," American Economic Review, American Economic Association, vol. 78(5), pages 1133-37, December.
- Christopher A. Laincz, 2002. "Market Structure and Endogenous Productivity Growth," Computing in Economics and Finance 2002 112, Society for Computational Economics.
- Aghion, Philippe & Howitt, Peter, 1992.
"A Model of Growth through Creative Destruction,"
Econometric Society, vol. 60(2), pages 323-51, March.
- Aghion, P. & Howitt, P., 1990. "A Model Of Growth Through Creative Destruction," DELTA Working Papers 90-12, DELTA (Ecole normale supérieure).
- Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," UWO Department of Economics Working Papers 8904, University of Western Ontario, Department of Economics.
- Philippe Aghion & Peter Howitt, 1990. "A Model of Growth Through Creative Destruction," NBER Working Papers 3223, National Bureau of Economic Research, Inc.
- Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
- Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," Working papers 527, Massachusetts Institute of Technology (MIT), Department of Economics.
- James A. Brander & Barbara J. Spencer, 1983.
"Strategic Commitment with R&D: The Symmetric Case,"
Bell Journal of Economics,
The RAND Corporation, vol. 14(1), pages 225-235, Spring.
- Christopher A. Laincz & Ana Rodrigues, 2006.
"The Impact of Cost Reducing R\&D Spillovers on the Ergodic Distribution of Market Structures,"
Computing in Economics and Finance 2006
307, Society for Computational Economics.
- Christopher A. Laincz & Ana Rodrigues, 2007. "The Impact of Cost-Reducing R&D Spillovers on the Ergodic Distribution of Market Structures," Working Papers 23, Portuguese Competition Authority.
- Laincz, Christopher & Rodrigues, Ana, 2012. "The Impact of Cost-Reducing R&D Spillovers on the Ergodic Distribution of Market Structures," School of Economics Working Paper Series 2012-16, LeBow College of Business, Drexel University.
- Richard Ericson & Ariel Pakes, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Oxford University Press, vol. 62(1), pages 53-82.
- Doraszelski, Ulrich & Satterthwaite, Mark, 2007. "Computable Markov-Perfect Industry Dynamics: Existence, Purification, and Multiplicity," CEPR Discussion Papers 6212, C.E.P.R. Discussion Papers.
- Jeroen Hinloopen, 2000. "More on subsidizing cooperative and noncooperative R&D in duopoly with spillovers," Journal of Economics, Springer, vol. 72(3), pages 295-308, October.
- Lahiri, Sajal & Ono, Yoshiyasu, 1988. "Helping Minor Firms Reduces Welfare," Economic Journal, Royal Economic Society, vol. 98(393), pages 1199-1202, December.
- Christopher Laincz, 2009. "R&D subsidies in a model of growth with dynamic market structure," Journal of Evolutionary Economics, Springer, vol. 19(5), pages 643-673, October.
- Christopher Budd & Christopher Harris & John Vickers, 1993. "A Model of the Evolution of Duopoly: Does the Asymmetry between Firms Tend to Increase or Decrease?," Review of Economic Studies, Oxford University Press, vol. 60(3), pages 543-573.
- Minoru Kitahara & Toshihiro Matsumura, 2006. "Realized Cost-Based Subsidies For Strategic R&D Investments With "Ex Ante" And "Ex Post" Asymmetries," The Japanese Economic Review, Japanese Economic Association, vol. 57(3), pages 438-448.
- Cohen, Wesley M & Levinthal, Daniel A, 1989. "Innovation and Learning: The Two Faces of R&D," Economic Journal, Royal Economic Society, vol. 99(397), pages 569-96, September.
When requesting a correction, please mention this item's handle: RePEc:ris:drxlwp:2012_013. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Richard C. Barnett)
If references are entirely missing, you can add them using this form.