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The R&D Incentives of Industry Leaders
Author(s) -
Segerstrom Paul S.,
Zolnierek James M.
Publication year - 1999
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/1468-2354.00038
Subject(s) - subsidy , incentive , investment (military) , government (linguistics) , production (economics) , welfare , economics , economic interventionism , business , industrial organization , public economics , microeconomics , market economy , finance , linguistics , philosophy , politics , political science , law
This paper presents a model to explain why industry leader firms often devote substantial resources to R&D activities and explores the welfare implications of this investment. The key new assumption is that industry leaders can improve their own products more easily than can other firms. When industry leaders have R&D cost advantages, it is optimal for the government to subsidize the R&D expenditures of all firms, subsidize the production expenditures of industry leaders, and tax the profits of new industry leaders. Without government intervention, market forces generate too much creative destruction.