Incremental R&D subsidies |
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Authors: | Martin Richardson Simon Wilkie |
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Institution: | (1) Department of Economics, University of Otago, P.O. Box 56, Dunedin, New Zealand;(2) Division of Humanities and Social Sciences, California Institute of Technology, 91125 Pasadena, CA |
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Abstract: | An Incremental Incentive Scheme (IIS) encourages some activity by rewarding an agent for overachieving a base level determined by past performance but not penalizing underachievement. We examine an IIS R&D subsidy in a dynamic model due to Grossman and Shapiro (1986). We show that the firm's optimal R&D path either cycles around the no-subsidy path or follows a ratchet pattern of small increases in R&D relative to the no-subsidy path. A simple condition determines which type of behavior occurs. Furthermore, we show that an IIS may be an inefficient method of encouraging R&D compared to a flat-rate subsidy.We wish to thank Gene Grossman and two referees for helpful comments. All remaining errors are our own. |
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