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Subsidies, Entry and the Distribution of R&D Investment

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  • John Asker
  • Mariagiovanna Baccara
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.
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Suggested Citation

  • John Asker & Mariagiovanna Baccara, 2009. "Subsidies, Entry and the Distribution of R&D Investment," Working Papers 09-10, New York University, Leonard N. Stern School of Business, Department of Economics.
    • Handle: RePEc:ste:nystbu:09-10
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    References listed on IDEAS

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    1. Jennifer F. Reinganum, 1985. "Innovation and Industry Evolution," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(1), pages 81-99.
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    Cited by:

    1. Natália Barbosa & Ana Paula Faria & Vasco Eiriz, 2014. "Industry- and firm-specific factors of innovation novelty," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 23(3), pages 865-902.

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    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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