The Differential Impact of Subsidies on Product Improvements

Ralph Siebert

Journal of Institutional and Theoretical Economics (JITE), 2019, vol. 175, issue 4, 583-616

Abstract: We consider a government that can promote innovation by providing subsidies to different firms. We find that providing a subsidy to only the high-quality firms returns the highest net total surplus and net consumer surplus, even though it resultsin the highest product prices and serves the fewest customers in the market. High-quality product customers are more adversely affected than low-quality ones. In terms of product variety, we show that innovators always withdraw their former products from the market. Finally, the high-quality firm has a higher incentive to hinder the low-quality firm from receiving a subsidy than vice versa.

Keywords: vertical product differentiation; new product introduction; subsidies; R&D policy; innovation; heterogeneous firms (search for similar items in EconPapers)
JEL-codes: L11 L13 L52 O31 O32 O38 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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DOI: 10.1628/jite-2019-0038

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