Working Paper: CEPR ID: DP4185
Authors: Jan Haaland; Hans Jarle Kind
Abstract: Should R&D policies within an economic union be centralized or decentralized to each individual country? Do non-cooperative policies - typically implying policy competition between countries - always give rise to too high R&D subsidies in a decentralized policy regime? Should small countries subsidize R&D more than larger countries? To address such questions, we construct a simple model with horizontally differentiated consumer goods, where each firm may invest in quality-improving R&D. Assuming that the goods are produced in different countries within an economic union, we compare non-cooperative and cooperative R&D policies. We show that non-cooperative policies imply too small R&D subsidies for horizontally differentiated goods and too high subsidies for goods that are close substitutes. Furthermore, small, net exporting countries of R&D intensive goods have fewer incentives to subsidize R&D than large countries, resulting in an unwarranted vertical product differentiation between goods produced in different countries. Coordination of R&D policies at the union level helps overcome some of these problems. If only a subset of countries cooperate, however, union welfare may be lower than if there is no R&D cooperation at all.
Keywords: Economic Union; Policy; Game; R&D
JEL Codes: F12; F13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| noncooperative R&D policies (O32) | suboptimal R&D subsidies for horizontally differentiated goods (O38) |
| noncooperative R&D policies (O32) | excessive subsidies for close substitutes (H23) |
| policy competition (L13) | suboptimal subsidy levels (H23) |
| coordination of R&D policies (O38) | mitigate issues of subsidy levels (H23) |
| coordination of R&D policies (O38) | lower union welfare than no cooperation (J58) |
| small net exporting countries of R&D-intensive goods (O39) | fewer incentives to subsidize R&D (O38) |
| large countries (O57) | more incentives to subsidize R&D (O38) |
| noncooperative policies (C72) | unwarranted vertical product differentiation (L15) |