A Computational Analysis of R&D Support Programs

Prof. Dan Peled, Dagoberto Garza, Yahel Giat, Steve Hackman
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Peled Dan, Garza Dagoberto, Giat Yahel, Hackman Steve. A Computational Analysis of R&D Support Programs Haifa Israel: Samuel Neaman Institute, 2013. https://www.neaman.org.il/EN/Computational-Analysis-RD-Support-Programs
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Government R&D support programs are examined within a dynamic equilibrium model of imperfectly competitive industries in order to study the effectiveness of such programs and the extent to which their design matters.  We compare two common support schemes, R&D tax credit and direct R&D grants.   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.

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