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Incremental R&D subsidies

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Abstract

An Incremental Incentive Scheme (IIS) encourages some activity by rewarding an agent for overachieving a base level determined by past performance but not penalizing underachievement. We examine an IIS R&D subsidy in a dynamic model due to Grossman and Shapiro (1986). We show that the firm's optimal R&D path either cycles around the no-subsidy path or follows a “ratchet” pattern of small increases in R&D relative to the no-subsidy path. A simple condition determines which type of behavior occurs. Furthermore, we show that an IIS may be an inefficient method of encouraging R&D compared to a flat-rate subsidy.

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Authors and Affiliations

  1. Department of Economics, University of Otago, P.O. Box 56, Dunedin, New Zealand

    Martin Richardson

  2. Division of Humanities and Social Sciences, California Institute of Technology, 91125, Pasadena, CA

    Simon Wilkie

Authors
  1. Martin Richardson
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  2. Simon Wilkie
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Additional information

We wish to thank Gene Grossman and two referees for helpful comments. All remaining errors are our own.

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Richardson, M., Wilkie, S. Incremental R&D subsidies. J Regul Econ 7, 161–175 (1995). https://doi.org/10.1007/BF01062689

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