Subsidizing Public Inputs
Neil Buckley, Stuart Mestelman and Mohamed Shehata
McMaster University
Deptartment of Economics
McMaster University
Working Paper No. 99-11
Draft of September 1999
Abstract
Investment in research and development (R&D) may
(with some probability) lead to reductions in a firm's production cost.
If the production-cost savings associated with successful research and
development is freely disseminated to other firms as soon as it is realized,
too few resources may be allocated to this input. In such an environment,
subsidies to the public input can lead to optimal input use. The
effectiveness of four alternative subsidy instruments in stimulating firms'
R&D spending are examined in this paper. Two are incremental
subsidies and the others are conventional level subsidies. One of
the incremental subsidies and one of the level subsidies crudely capture
characteristics of incentive mechanisms used in the United States and Canada.
A laboratory implementation of these instruments generally confirms that
incremental subsidies are inferior to level subsidies.
[ Paper
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Stuart Mestelman
Department of Economics
McMaster University
Hamilton, Ontario L8S 4M4
Canada
e-mail: mestelma@mcmaster.ca
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