Industrial policy and firm heterogeneity

Our concern in this paper is with firm-specific industrial policy. When R&D subsidies or taxes are differentiated among firms, the question arises as to which firms in an industry should receive such support. We analyze a sit uation where firms differ in their R&D technologies in two distinct ways: i n the costs of performing R&D activities and in the output obtained from su ch activities. We find that the optimal firm-specific industrial policy is affected differently by the two sources of firm heterogeneity. Furthermore, a change in a firm's R&D productivity has an ambiguous effect on the optim al policy towards the firm.