Optimal Subsidy Policy for Innovation: Technology Push and Demand Pull

72 Pages Posted: 16 Dec 2021 Last revised: 13 Jul 2022

See all articles by Myeonghun Lee

Myeonghun Lee

College of Business, Korea Advanced Institute of Science and Technology (KAIST)

Hyun-Soo Ahn

University of Michigan, Stephen M. Ross School of Business

Hakjin Chung

College of Business, Korea Advanced Institute of Science and Technology (KAIST)

Sang Won Kim

College of Business, Korea Advanced Institute of Science and Technology (KAIST)

Date Written: December 10, 2021

Abstract

Government plays a critical role in the development and adoption of new technology with social benefits. While there are many policies available under different forms and names, the two most popular subsidy policies are a technology-push policy, which awards manufacturers for R&D efforts, and a demand-pull policy, which directly awards customers. We study how the government should utilize a mix of push and pull subsidies to maximize the benefit from new technology and increase customer adoption when there are multiple manufacturers in the market. In particular, we examine how technology spillovers influence the optimal subsidy and resultant market outcomes.

We provide a complete characterization of an optimal subsidy policy as a function of the technology benefit and derive the resultant equilibrium outcomes. We find that while the government will spend more for a more beneficial technology, the push and pull subsidies themselves change non-monotonically in technology benefit. For instance, the optimal push subsidy does not always decrease in benefit and the optimal pull subsidy given to early adopters does not always increase in benefit.

We find that the level of technology spillover critically affects the firm's incentive to invest and the optimal subsidy. On the contrary to the conventional wisdom that an increase in the spillover level will discourage a firm's R&D investment, we find that the spillover can induce more firms to invest in R&D. Using analytical and numerical results, we examine when it is most beneficial to use a mix of push and pull subsidy policies.

Keywords: innovation; government subsidies; competition; technology spillover

Suggested Citation

Lee, Myeonghun and Ahn, Hyun-Soo and Chung, Hakjin and Kim, Sang Won, Optimal Subsidy Policy for Innovation: Technology Push and Demand Pull (December 10, 2021). KAIST College of Business Working Paper Series No. 2021-021, Available at SSRN: https://ssrn.com/abstract=3986593 or http://dx.doi.org/10.2139/ssrn.3986593

Myeonghun Lee

College of Business, Korea Advanced Institute of Science and Technology (KAIST) ( email )

85 Hoegiro Dongdaemun-Gu
Seoul 02455
Korea, Republic of (South Korea)

Hyun-Soo Ahn (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan St
R5456
Ann Arbor, MI 48109-1234
United States

Hakjin Chung

College of Business, Korea Advanced Institute of Science and Technology (KAIST) ( email )

85 Hoegiro Dongdaemun-Gu
Seoul 02455
Korea, Republic of (South Korea)

Sang Won Kim

College of Business, Korea Advanced Institute of Science and Technology (KAIST) ( email )

85 Hoegiro Dongdaemun-Gu
Seoul 02455
Korea, Republic of (South Korea)

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