Pros and Cons of Backing Winners in Innovation Policy

Seung-Gyu Jo () and Frank Den Butter ()

MPRA Paper from University Library of Munich, Germany

Abstract: In the economics profession there is a fierce debate whether industrial and innovation policy should be targeted to specific sectors or firms. This paper discusses the welfare effects of such targeted policies in a third-market international trade model under imperfect competition. A theoretical case for picking winners through a preferential innovation policy is discussed, which is shown to hold without evoking retaliation from foreign competitors. However, in practice information uncertainties remain a concern. The question whether in this case ‘backing winners’ is a wise policy option depends on the characteristics of the information asymmetries and on the extent the government is able to design selection procedures in a way to minimize the transaction costs that may be caused from the market participants’ opportunistic behavior.

Keywords: Innovation policy; R&D subsidies, strategic trade policy, asymmetric information, spill-over effects (search for similar items in EconPapers)
JEL-codes: C73 F12 O24 O32 (search for similar items in EconPapers)
Date: 2009-02
New Economics Papers: this item is included in nep-ino
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