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Subsidies, Entry and the Distribution of R&D Investment

  • John Asker
  • Mariagiovanna Baccara

We analyze the link between entry and R&D spending distribution. We consider a monopolistic competitive market with free entry in which firms can invest in cost-cutting R&D by paying a fixed cost first. For an intermediate level of fixed cost, there is a unique equilibrium in which the market segments into investing and non-investing firms. We show that the measure of R&D investing firms decreases as entry occurs. Using this result, we show how alternative government policies affect the R&D spending distribution. In particular, we characterize the cases in which incentives to promote R&D spending can result in exit. We show that while subsidy to entry may be welfare neutral from the consumers' point of view, R&D subsidies, despite promoting exit sometimes, are always welfare improving. Data motivating these results are drawn from the Taiwanese and Korean semiconductor industries.

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Paper provided by New York University, Leonard N. Stern School of Business, Department of Economics in its series Working Papers with number 08-5.

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Date of creation: 2008
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Handle: RePEc:ste:nystbu:08-5
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