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CRIEFF Discussion Paper Number 1008

R&D Subsidies, Spillovers and Privatization in Mixed Markets

Maria José Gil-Moltó (University of Leicester), Joanna Poyago-Theotoky (Loughborough University) and Vasileios Zikos (University of Surrey)

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We examine the use of subsidies to R&D in a mixed and a private duopoly market. We show that the socially optimal R&D subsidy is increasing in the degree of spillovers but it is lower in the private duopoly. The optimal R&D subsidy leads to an increase in total R&D and production, however, it does not lead to the equalisation of per firm output and therefore to an efficient distribution of production costs. We also find that privatization of the public firm reduces R&D activity and welfare in the duopoly market. This result stands even when optimal R&D subsidies are provided.

JEL codes: L31, L32, O38, L13, L50
Keywords: mixed duopoly, process innovation, R&D subsidies, privatization, spillovers

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