Subsidies, Entry and the Distribution of R&D Investment

36 Pages Posted: 25 Apr 2008 Last revised: 18 Dec 2009

Multiple version iconThere are 2 versions of this paper

Date Written: November 16, 2008

Abstract

We analyze the link between entry and R&D spending distribution. We consider a monopolistic competitive market with free entry in which firms can invest in cost-cutting R&D by paying a fixed cost first. For an intermediate level of fixed cost, there is a unique equilibrium in which the market segments into investing and non-investing firms. We show that the measure of R&D investing firms decreases as entry occurs. Using this result, we show how alternative government policies affect the R&D spending distribution. In particular, we characterize the cases in which incentives to promote R&D spending can result in exit. We show that while subsidy to entry may be welfare neutral from the consumers' point of view, R&D subsidies, despite promoting exit sometimes, are always welfare improving. Data motivating these results are drawn from the Taiwanese and Korean semiconductor industries.

Keywords: Entry, Subsidy, Research and Development, Product Differentiation

JEL Classification: L11, L63, O2, O31, D24, D43

Suggested Citation

Asker, John William and Baccara, Mariagiovanna, Subsidies, Entry and the Distribution of R&D Investment (November 16, 2008). Available at SSRN: https://ssrn.com/abstract=1124946 or http://dx.doi.org/10.2139/ssrn.1124946

John William Asker (Contact Author)

UCLA ( email )

8283 Bunche Hall
Los Angeles, CA 90095-1477
United States

Mariagiovanna Baccara

Washington University in St. Louis ( email )

One Brookings Drive
Campus Box 1208
Saint Louis, MO MO 63130-4899
United States

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