R&D Subsidies, Spillovers and Privatization in Mixed Markets
Posted: 10 Apr 2011
Date Written: October 1, 2010
We examine the use of subsidies to R&D in a mixed and a private duopoly market. We show that the socially optimal R&D subsidy is increasing in the degree of spillovers but it is lower in the private duopoly. The optimal R&D subsidy leads to an increase in total R&D and production, however, it does not lead to the equalisation of per firm output and therefore to an efficient distribution of production costs. We also find that privatization of the public firm reduces R&D activity and welfare in the duopoly market. This result stands even when optimal R&D subsidies are provided.
Keywords: mixed Duopoly, Process Innovation, R&D Subsidies, Privatization, Spillovers
JEL Classification: L31, L32, O38, L13, L50
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