A computational analysis of R&D support programs |
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| Authors: | Dagoberto Garza Yahel Giat Steven T. Hackman |
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| Affiliation: | 1. Department of Industrial and Systems Engineering, Tecnologico de Monterrey, Monterrey, Mexico;2. Department of Industrial Engineering and Management, Jerusalem College of Technology, Jerusalem, Israel;3. School of Industrial and Systems Engineering, Georgia Institute of Technology, Atlanta, GA, USA |
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| Abstract: | We compare two common government R&D support programs, R&D tax credits and direct R&D grants. To study their effectiveness and the extent to which their design matters, we analyze these programs within a dynamic equilibrium model of imperfectly competitive industries. Adopting comprehensive welfare measures that take into account government, producer and consumer surpluses, we find that both schemes exhibit positive social returns. Mid-range R&D-intensive sectors exhibit higher social returns than either high or low R&D-intensive sectors. Both incentive schemes generate positive measures of R&D input additionality of magnitudes consistent with empirical R&D research. However, R&D grants that require firms to allocate subsidy funds to R&D spur less R&D than a more flexible R&D tax credit. Subsidy schemes can even induce competing firms to over-spend on R&D, generating negative producer surplus and possibly negative social returns. |
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| Keywords: | R& D subsidies tax credits competition process and product R& D R& D price elasticity R& D additionality social welfare |
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