Incremental R&D Subsidies

Martin Richardson and Simon Wilkie

Journal of Regulatory Economics, 1995, vol. 7, issue 2, 75 pages

Abstract: An Incremental Incentive Scheme (IIS) encourages some activity by rewarding an agent for overachieving a base level determined by past performance but not penalizing underachievement. We examine an IIS R&D subsidy in a dynamic model due to Grossman and Shapiro (1986). We show that the firm's optimal R&D path either cycles around the no-subsidy path or follows a "ratchet" pattern of small increases in R&D relative to the no-subsidy path. A simple condition determines which type of behavior occurs. Furthermore, we show that an IIS may be an inefficient method of encouraging R&D compared to a flat-rate subsidy. Copyright 1995 by Kluwer Academic Publishers

Date: 1995
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Working Paper: INCREMENTAL R$D SUBSIDIES (1988)
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