Conditional R&D Subsidies

Gamal Atallah

No 0702E, Working Papers from University of Ottawa, Department of Economics

Abstract: This paper introduces a new type of R&D subsidy, which is conditional on the success of the R&D project. In a threestage model, the government chooses a subsidy(ies) in the first stage; in the second stage, a monopolist chooses R&D effort which determines the size or the probability of success of the R&D project; in the last stage, the firm chooses its output. It is found that conditional subsidies can yield the same level of innovation and welfare as unconditional subsidies. However, when the probability of success is sufficiently low (be it endogenous or exogenous), conditional subsidies yield suboptimal levels of innovation and welfare. When the firm chooses the probability of success, conditional subsidies can have the advantage of a lower expected cost of the subsidy to the government. I consider the simultaneous use of conditional and unconditional subsidies, and show that different combinations of the two can lead to the same levels of innovation and welfare as unconditional subsidies alone. Finally, reverse conditional subsidies, which the firm gets only if the project fails, are considered. It is found that they yield the same level of innovation as unconditional subsidies, except when the probability of success is sufficiently high. Comparing conditional subsidies with reverse conditional subsidies, conditional subsidies yield higher (lower) welfare when the probability of success is high (low).

Keywords: R&D subsidies; Innovation; R&D policy; Innovation policy (search for similar items in EconPapers)
JEL-codes: L12 L52 O31 O38 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2007
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Related works:
Journal Article: Conditional R&D subsidies (2014)
Working Paper: Conditional R&D Subsidies (2007)
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