Spillovers, subsidies, and second‐best socially optimal R&D

Abstract

This paper provides a thorough second‐best welfare analysis of the standard two‐stage model of R&D/product market competition with R&D spillovers. The planner's solution is compared to the standard non‐cooperative scenario, the R&D cartel, and the cartelized research joint venture (or joint lab). We introduce the notion of a social joint lab, as a way for the planner to avoid wasteful R&D duplication. With no spillovers, the non‐cooperative scenario, the joint lab, and the second‐best planner's solutions coincide. However, with spillovers, all three scenarios yield R&D investments that fall short of the socially optimal level. To shed light on the role of the spillover level on these comparisons, we observe that the gaps between the market outcomes and the planners solutions widen as the spillover parameter increases. Finally, we establish that a social planner and a social joint lab solutions may be achieved starting from any of the three scenarios by offering firms respective suitably weighted quadratic R&D subsidization schedules.

A Note on R&D Innovation with Socially Responsible Firms

“…The public policy to incentivise the firm's R&D effort directly follows the model of Amir et al (2019) and shows that k has a relevant role at the optimum. Specifically, unlike Amir et al (2019), when firms are CSR-oriented the optimal subsidy is positive also in the absence of R&D spillovers (β = 0).…”

“…This result-together with that on social welfare-opens the route to policies that favour the CSR behaviour. A policy instrument that can be used in this environment is represented by the standard R&D subsidy aimed at incentivising the private R&D effort along the line of Hinloopen (1997), Hinloopen (2000) and Amir et al (2019). In what follows, we briefly present the structure of the R&D incentive scheme in the subgame I/I and then compare the welfare outcomes.…”

“…The higher is the firm's social concern, the higher is the positive welfare effect of the R&D on the society. Finally, the article studies the role of R&D subsidies in an economy with CSR-oriented firms finding, unlike the related existing literature (e.g., Amir et al 2019), that it is convenient to subsidise the R&D activity also in the absence of R&D spillovers, i.e., R&D subsidies can be used as a welfare-maximising tool with or without disclosure on the results of the R&D activity.…”

Process R&D investment and social dilemmas

“…We introduce the social dilemma perspective into the broader literature on strategic behavior of firms in R&D which in turn is a straightforward continuation of the debate initiated by Schumpeter (1942) on the relationship between industry structure and incentives to undertake R&D. In the relevant following literature, cf., e.g., Spence (1984), Katz (1986), d'Aspremont andJacquemin (1988), Kamien et al (1992), Kamien and Zang (2000), Amir et al (2011), Burr et al (2013, Bourreau et al (2016), Capuano and Grassi (2019), the behavior of firms in R&D is modeled by non-cooperative games (see also Cosandier et al 2017or Amir et al 2019, in which enterprises, first, simultaneously and independently decide about their R&D investments (these decisions affect the total manufacturing costs of each enterprise), and, further, compete in the final product market according to a given (quantity or price) competition model. To be specific, our paper is directly related to works by Amir et al (2011) and Burr et al (2013), but we introduce the broader social dilemma perspective into the analysis.…”

Introduction to the thematic issue on “Regulation in health, environmental and innovation sectors”

“…The paper by Osório and Alberto Pinto (2020) proposes to enlarge the usual compass of a standard two‐stage model of R&D and product market competition in industrial organization by invoking its known implications to explain an important global trends of a macro‐economic nature: increased economic inequality. The authors consider a series of technologically related exogenous trends or government policies that are put forward as key drivers of the increased income inequality: public R&D incentives, increasing horizontal integration (via mergers and acquisitions, R&D collaboration, minority and cross‐shareholding), and R&D spillover effects (see e.g., Amir et al, 2019 and Chalioti, 2019). The main conclusion of the paper is that public R&D incentives and the increasing horizontal integration have biased the income distribution towards the top income group.…”