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.
Bibliographical noteFunding Information:
This research was partially funded by the Science Technology and the Economy (STE) Program at the Samuel Neaman Institute and Technion-Israel Institute of Technology.
© 2014 Taylor & Francis.
- R&D additionality
- R&D price elasticity
- R&D subsidies
- process and product R&D
- social welfare
- tax credits
ASJC Scopus subject areas
- Economics, Econometrics and Finance (all)
- Management of Technology and Innovation