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The Journal of Technology Transfer

, Volume 37, Issue 4, pp 385–403 | Cite as

R&D subsidy games: a cost sharing approach vs. reward for performance

  • Richard T. GretzEmail author
  • Jannett Highfill
  • Robert C. Scott
Article

Abstract

This paper investigates government subsidy games for private sector research and development (R&D) in a two-country two-firm intra-industry trade model. Two funding structures are compared: “cost sharing” vs. “reward for performance.” Both the theoretical evidence and the results of a Monte Carlo simulation suggest that cost sharing is associated with higher social surplus and quality improvement because it prompts the firm to do more R&D. In a cost sharing program government and firm R&D are always complements. In the reward for performance program government and firm R&D may be complements, but are usually substitutes. In the Monte Carlo results the average firm contribution to R&D expenditure is actually negative with a reward for performance funding structure—raising the question of whether it might be construed as corporate welfare. Finally, the paper characterizes funding priorities for both structures in the case when subsidy dollars are scarce and when they are not.

Keywords

R&D Subsidy Cost sharing Reward for performance Corporate welfare 

JEL Classification

F12 O38 H25 F15 

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Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  • Richard T. Gretz
    • 1
    Email author
  • Jannett Highfill
    • 1
  • Robert C. Scott
    • 1
  1. 1.Bradley UniversityPeoriaUSA

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