Government Subsidies of R&D in a Product Cycle Framework: US-Japan Simulations

Alison Butler and Shannon Mitchell

Review of International Economics, 1998, vol. 6, issue 3, 386-400

Abstract: The welfare effects of R&D subsidies are examined using a product cycle model of trade between two developed countries. Simulations are done for steady-state welfare in Japan and the USA for high- and low-skilled labor over different combinations of subsidy rates. Japanese subsidies to R&D usually benefit Americans owing to an increase in product variety. However, because Japanese R&D reduces wages in the US high-tech sector, American high-skilled workers are hurt if Japanese subsidies are too large. Large American subsidies may cause Japanese innovation to cease. However, Japanese steady-state welfare would be maximized in this case. Copyright 1998 by Blackwell Publishing Ltd.

Date: 1998
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