Working Paper: CEPR ID: DP4784
Authors: Jan I. Haaland; Hans Jarle Kind
Abstract: We set up a simple trade model with two countries hosting one firm each. The firms invest in cost-reducing R&D, and each government may grant R&D subsidies to the domestic firm. We show that it is optimal for a government to provide higher R&D subsidies the lower the level of trade costs, even if the firms are independent monopolies. If firms produce imperfect substitutes, policy competition may become so fierce that only one of the firms survives. International policy harmonization eliminates policy competition and ensures a symmetric outcome. However, it is shown that harmonization is not necessarily welfare-maximizing. The optimal coordinated policies may imply an asymmetric outcome with R&D subsidies to only one of the firms.
Keywords: Process Innovation; R&D Subsidies; Trade
JEL Codes: F12; F13; F15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower trade costs (F19) | higher R&D investments (O39) |
| higher R&D investments (O39) | increased domestic and international sales (F69) |
| lower trade costs (F19) | higher R&D subsidies (O38) |
| R&D subsidies (O38) | reduced number of product varieties (L15) |
| policy competition (L13) | market structure (D49) |