R&D Subsidies versus R&D Cooperation in a Duopoly with Spillovers and Pollution[Note 1. This is a substantially revised version of “Environmental Impact ...]

We introduce pollution, as a by‐product of production, into a non‐tournament model of R&D with spillovers. Technology policy takes the form of either R&D subsidisation or pre‐competitive R&D cooperation. We show that, when the emissions tax is exogenous, the optimal R&D subsidy can be negative, i.e. there should be a tax on R&D, depending on the extent of the appropriability problem and the degree of environmental damage. In a wide class of cases, depending on the parameter values, welfare in the case of R&D cooperation, is lower than welfare in the case of R&D subsidisation.