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Are R&D subsidies provided optimally? Evidence from a simulated agency-firm stochastic dynamic game

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Abstract
By means of a simulated funding-agency/supported-firm stochastic dynamic game, this paper firstly shows that not only the level of R&D performed by firms is underprovided (as maintained by traditional literature on the subject), but also the level of the subsidy provided by the funding (public) agency (used to correct exactly for the corporate R&D shortage). This event is due to externalities generated by the agency-firm strategic relationship. Two versions of the model are simulated and compared: one assuming rival behaviors between companies and agency, and one associated to the Social-planner (or cooperative) strategy. Secondly, the paper looks at what “welfare” implications are associated to different degree of funding effect’s persistency. Three main conclusions are drawn: (i) the relative quota of subsidy to R&D is undersized in the rival compared to the Social-planner model; (2) the rivalry strategy generates distortions that favor the agency compared to firms; (3) when passing from less persistent to more persistent R&D additionality/crowding-out effect, the lower the bias the greater the variance is and vice versa. As for the management of R&D funding policies, all the elements favouring greater collaboration between agency and firm objectives can help current R&D support to reach its social optimum.

Suggested Citation

  • Giovanni Cerulli, 2010. "Are R&D subsidies provided optimally? Evidence from a simulated agency-firm stochastic dynamic game," CERIS Working Paper 201011, CNR-IRCrES Research Institute on Sustainable Economic Growth - Torino (TO) ITALY - former Institute for Economic Research on Firms and Growth - Moncalieri (TO) ITALY.
    • Handle: RePEc:csc:cerisp:201011
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    Cited by:

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    2. Giovanni Cerulli & Federico Cecconi & Maria Augusta Miceli & Pierpaolo Angelini & Bianca Potì, 2015. "R&Dsimulab: a micro-policy simulator for an ex-ante assessment of the effect of public R&D policies," EcoMod2015 8631, EcoMod.
    3. Dai, Xiaoyong & Cheng, Liwei, 2015. "The effect of public subsidies on corporate R&D investment: An application of the generalized propensity score," Technological Forecasting and Social Change, Elsevier, vol. 90(PB), pages 410-419.

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    More about this item

    Keywords

    R&D subsidies; Rivalry vs. cooperation; Dynamic-stochastic games; Simulations;
    All these keywords.

    JEL classification:

    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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