Cost-Reducing R&D with Spillovers and Trade
Journal of Institutional and Theoretical Economics (JITE), vol. 167, no. 2, pp.314-326, 2011
Posted: 22 Mar 2016 Last revised: 19 Apr 2016
Date Written: 2011
This article incorporates research spillovers and examines behavior of firms in a two-stage, international trade game with process innovation. Governments choose optimal research subsidies in stage 1, and firms take account of the subsidies in choosing research and production in stage 2. Results show that optimal research subsidies differ under spillovers and no spillovers. Strategic responses to foreign research subsidies uniquely occur in cases with spillovers. At certain spillover levels, the optimal R&D policy is a negative subsidy (tax). Findings regarding the effects of trade liberalization support earlier results with perfect appropriability, although the responses to trade liberalization are different with spillovers.
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