Are Public and Private R&D Investments Complements or Substitutes?

20 Pages Posted: 27 Jul 2014

See all articles by Anna Bohnstedt

Anna Bohnstedt

University of Duisburg-Essen - Mercator School of Management

Date Written: May 25, 2014

Abstract

We develop a general equilibrium model with heterogeneous firms à la Melitz (2003), where both the government and firms can invest into R&D to improve the country’s technological potential. A higher technological potential raises the average productivity of firms, thus implying lower consumer prices, and eventually leads to a welfare gain. The government’s public and firms’ private investments are modelled in a three-stage game, in which the government in the first stage invests into a basic research level, and then firms conduct private R&D building on this publicly provided “technology” in the second stage. We find that private R&D investments are hump-shaped with respect to the basic research level. For lower levels public and private investments are complements, while for higher levels they are substitutes.

Keywords: Heterogeneous firms; public and private R&D investments; basic research; innovation

JEL Classification: O3, H4

Suggested Citation

Bohnstedt, Anna, Are Public and Private R&D Investments Complements or Substitutes? (May 25, 2014). Available at SSRN: https://ssrn.com/abstract=2471558 or http://dx.doi.org/10.2139/ssrn.2471558

Anna Bohnstedt (Contact Author)

University of Duisburg-Essen - Mercator School of Management ( email )

Lotharstraße 65
Duisburg, Nordrhein-Westfalen 47057
Germany

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