A computational analysis of R&D support programs

Dagoberto Garza, Yahel Giat, Steven T. Hackman and Dan Peled ()

Economics of Innovation and New Technology, 2015, vol. 24, issue 7, 682-709

Abstract: We compare two common government R&D support programs, R&D tax credits and direct R&D grants. To study their effectiveness and the extent to which their design matters, we analyze these programs within a dynamic equilibrium model of imperfectly competitive industries. Adopting comprehensive welfare measures that take into account government, producer and consumer surpluses, we find that both schemes exhibit positive social returns. Mid-range R&D-intensive sectors exhibit higher social returns than either high or low R&D-intensive sectors. Both incentive schemes generate positive measures of R&D input additionality of magnitudes consistent with empirical R&D research. However, R&D grants that require firms to allocate subsidy funds to R&D spur less R&D than a more flexible R&D tax credit. Subsidy schemes can even induce competing firms to over-spend on R&D, generating negative producer surplus and possibly negative social returns.

Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:taf:ecinnt:v:24:y:2015:i:7:p:682-709

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DOI: 10.1080/10438599.2014.981004

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