Scandinavian Working Papers in Economics

Working Papers,
Copenhagen Business School, Department of Economics

No 17-2005: R&D Subsidies and the Surplus Appropriability Problem

Anders Sørensen
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Anders Sørensen: Department of Economics, Copenhagen Business School, Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark

Abstract: It may be optimal from a welfare perspective to use R&D subsidies when the source of R&D distortions originates from the surplus appropriability problem and technological spillovers in the form of knowledge spillovers, creative destruction, and duplication externalities are absent. Hence, R&D subsidies may constitute the optimal policy even when subsidies directly targeted on monopoly pricing could be applied. The result holds when dynamic effects are important relative to static effects and when governments spending is restricted. The latter characteristic arises when a government is unable or unwilling to use the level of spending required to implement the optimum policy. The argument is developed in a semi-endogenous growth model where the only distortion is monopoly pricing of intermediate goods.

Keywords: R&D; policy instruments; welfare; market power

JEL-codes: O38; O41

31 pages, September 13, 2005

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