OPTIMAL R&D SUBSIDIES WITH HETEROGENEOUS FIRMS IN A DYNAMIC SETTING

Date
2019-07
Authors
Hall, Joshua D.
Laincz, Christopher A.
Journal Title
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Volume Title
Publisher
Cambridge University Press
Abstract
When observably heterogeneous firms engage in R&D and policy can be conditioned on the heterogeneity, what is the optimal policy? This paper starts with a static duopoly model of R&D competition with uncertainty and finds it welfare enhancing to subsidize the larger firms with no subsidies for the smaller firm, extending existing results. This result follows because the policymaker's goal is to minimize the average cost of production. Our paper demonstrates that these results are not robust to a dynamic setting. The optimal policy depends on the equilibrium type of competition that emerges without intervention—an insight that cannot be found in a static setting. In a dynamic setting, the degree of competition becomes an endogenous variable. Interestingly, although the optimal policy in some cases provides a slightly larger subsidy for the larger firm, it is the smaller firm that benefits most in terms of firm value. [ABSTRACT FROM AUTHOR]   Copyright of Macroeconomic Dynamics is the property of Cambridge University Press and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)
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Keywords
Research Subject Categories::SOCIAL SCIENCES::Business and economics, Research Subject Categories::TECHNOLOGY::Industrial engineering and economy::Industrial organisation, administration and economics
Citation
Hall, J. D., & Laincz, C. A. (2020). Optimal R&D Subsidies with Heterogeneous Firms in a Dynamic Setting. Macroeconomic Dynamics, 24(7), 1815–1849. https://doi.org/10.1017/S1365100519000026
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