R&D Subsidy Games: A Cost Sharing Approach vs. Reward for Performance

Posted: 16 Jan 2011

See all articles by Richard T. Gretz

Richard T. Gretz

Bradley University

Jannett Highfill

Bradley University

Robert C. Scott

Bradley University - Foster College of Business Administration

Date Written: January 13, 2011

Abstract

This paper investigates government subsidy games for private sector research and development (R&D) in a two-country two-firm intra-industry trade model. Two funding structures are compared: "cost sharing" vs. "reward for performance." Both the theoretical evidence and the results of a Monte Carlo simulation suggest that cost sharing is associated with higher social surplus and quality improvement because it prompts the firm to do more R&D. In a cost sharing program government and firm R&D are always complements. In the reward for performance program government and firm R&D may be complements, but are usually substitutes. In the Monte Carlo results the average firm contribution to R&D expenditure is actually negative with a reward for performance funding structure - raising the question of whether it might be construed as corporate welfare. Finally, the paper characterizes funding priorities for both structures in the case when subsidy dollars are scarce and when they are not.

Keywords: R&D, Subsidy, Cost Sharing, Reward for Performance, Corporate Welfare

JEL Classification: F12, O38, H25, F15

Suggested Citation

Gretz, Richard T. and Highfill, Jannett and Scott, Robert C., R&D Subsidy Games: A Cost Sharing Approach vs. Reward for Performance (January 13, 2011). Journal of Technology Transfer, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1739971

Richard T. Gretz (Contact Author)

Bradley University ( email )

United States

Jannett Highfill

Bradley University ( email )

Peoria, IL 61625
United States

Robert C. Scott

Bradley University - Foster College of Business Administration ( email )

Department of Economics
Peoria, IL 61625
United States
309-677-2297 (Phone)
309-677-4174 (Fax)

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