SUBSIDIZING COOPERATIVE AND NONCOOPERATIVE RESEARCH-AND-DEVELOPMENT IN DUOPOLY WITH SPILLOVERS

Comparing the effect on private R&D investments of allowing firms to c ooperate in R&D with that of providing R&D subsidies reveals that in g eneral the latter policy is more effective than the former in promotin g R&D activity. Analyzing the implementation of both policies simultan eously reveals that subsidizing cooperative and noncooperative R&D lea ds to the same market outcome. The preferred R&D-stimulating policy is to subsidize optimally an agreement according to which firms only sha re the outcomes of their independent research.