Download This PaperSubsidizing Technological Innovations in the Presence of R&D Spillovers
16 Pages Posted: 6 Mar 2006
Date Written: November 2005
Abstract
We analyze a situation where a principal wants to induce two firms to produce an output, e.g. electricity from renewable energy sources. Firms can undertake non-contractible investments to reduce production cost of the output. Part of these investments spills over and also reduces production cost of the other firm. Comparing a general price subsidy and an innovation tournament, we find that the principal's expected cost of implementing a given expected output are always higher under the tournament, even though this scheme may lead to more innovation.
Keywords: R&D spillovers, tournaments, subsidies, moral hazard
JEL Classification: Q55, D82, H23, D43
Suggested Citation: Suggested Citation
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