R&D subsidy and output subsidy in a duopoly: The role of technology spillover and R&D budget

Xing Gao, Xifan Wang, Weijun Zhong and Ying Wang

Australian Economic Papers, 2023, vol. 62, issue 3, 524-538

Abstract: Technology spillover and research and development (R&D) budget are relevant on government subsidies that aim at improving social welfare through enhancing R&D incentives of firms. However, there has not been related literature considering these two factors. To fill this gap, this paper examines the effect of technology spillover and R&D budget on R&D competition of duopolistic firms and government subsidies by constructing a game‐theoretic model. We find that while each firm's profit sometimes increases with R&D budget for low coefficient of technology spillover, this profit may decrease with R&D budget for high coefficient of technology spillover due to the intensified R&D competition. We show that when both R&D budget and the coefficient of technology spillover remain high, R&D subsidy leads to higher social welfare than output subsidy and otherwise R&D subsidy results in lower social welfare.

Date: 2023
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https://doi.org/10.1111/1467-8454.12307

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Persistent link: https://EconPapers.repec.org/RePEc:bla:ausecp:v:62:y:2023:i:3:p:524-538

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