Working Paper: CEPR ID: DP1986
Authors: Pedro P. Barros; Tore Nilssen
Abstract: Our concern is about a firm-specific industrial policy. When R&D subsidies or taxes are differentiated among firms, the question arises which firms in an industry should receive such support. We analyse a situation where firms differ in their R&D technologies in two distinct ways: they differ both in the costs of performing R&D activities and in the output obtained from such activities. The introduction of several domestic firms creates a corrective motive for government intervention with the firms' R&D activities in addition to Spencer and Brander's strategic motive. We find that the optimal firm-specific industrial policy is affected differently by the two sources of firm heterogeneity. Moreover, a change in a firm's R&D productivity has an ambiguous effect on the optimal policy towards the firm.
Keywords: firm heterogeneity; industrial policy; R&D
JEL Codes: F13; L52; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm heterogeneity in R&D costs and productivity (D29) | optimal firm-specific industrial policy (L52) |
| increase in a firm's R&D productivity (O32) | optimal tax or subsidy (H21) |
| foreign firms engaging in R&D (F23) | optimal policy shift from tax to subsidy (H23) |