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Pros and Cons of ‘Backing Winners’ in Innovation Policy

Author

Listed:
  • Frank A.G. den Butter

    (VU University Amsterdam)

  • Seung-gyu Jo

    (VU University Amsterdam)

Abstract

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 from the perspective of strategic game theory of the firm. A theoretical case for picking winners through a preferential innovative policy is discussed in a third-market international trade model, 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 which minimize the transaction costs that may be caused from the market participants’ opportunistic behavior.

Suggested Citation

  • Frank A.G. den Butter & Seung-gyu Jo, 2009. "Pros and Cons of ‘Backing Winners’ in Innovation Policy," Tinbergen Institute Discussion Papers 09-012/3, Tinbergen Institute.
  • Handle: RePEc:tin:wpaper:20090012
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    References listed on IDEAS

    as
    1. 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.
    2. J. Peter Neary & Paul O'Sullivan, 1999. "Beat 'em or Join 'em? Export Subsidies versus International Research Joint Ventures in Oligopolistic Markets," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(4), pages 577-596, December.
    3. 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.
    4. Jonathan Eaton & Gene M. Grossman, 1986. "Optimal Trade and Industrial Policy Under Oligopoly," The Quarterly Journal of Economics, Oxford University Press, vol. 101(2), pages 383-406.
    5. Qui, Larry D., 1994. "Optimal strategic trade policy under asymmetric information," Journal of International Economics, Elsevier, vol. 36(3-4), pages 333-354, May.
    6. 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.
    7. Bergstrom, Theodore C. & Varian, Hal R., 1985. "Two remarks on Cournot equilibria," Economics Letters, Elsevier, vol. 19(1), pages 5-8.
    8. Neary, J.P., 1999. "R&D in Developing Countries: What Should Governments Do?," Papers 99/27, College Dublin, Department of Political Economy-.
    9. Kujal Praveen & Ruiz Juan M., 2007. "Cost Effectiveness of R&D and Strategic Trade Policy," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 7(1), pages 1-35, April.
    10. 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, May.
    11. Gruenspecht, Howard K., 1988. "Export subsidies for differentiated products," Journal of International Economics, Elsevier, vol. 24(3-4), pages 331-344, May.
    12. Brander, James A. & Spencer, Barbara J., 1985. "Export subsidies and international market share rivalry," Journal of International Economics, Elsevier, vol. 18(1-2), pages 83-100, February.
    13. 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.
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    More about this item

    Keywords

    Innovation policy; R&D subsidies; strategic trade policy; asymmetric information; spill-over effects;

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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