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Pros and Cons of Backing Winners in Innovation Policy

By Seung-gyu Jo and Frank A. G. den Butter

Abstract

In the economics profession there is a fierce debate whether industrial and innovation policy should be targeted to specific sectors or firms. This paper discusses the welfare effects of such targeted policies in a third-market international trade model under imperfect competition. A theoretical case for picking winners through a preferential innovation policy is discussed, which is shown to hold without evoking retaliation from foreign competitors. However, in practice information uncertainties remain a concern. The question whether in this case ‘backing winners’ is a wise policy option depends on the characteristics of the information asymmetries and on the extent the government is able to design selection procedures in a way to minimize the transaction costs that may be caused from the market participants’ opportunistic behavior.

Topics: O24 - Trade Policy; Factor Movement Policy; Foreign Exchange Policy, F12 - Models of Trade with Imperfect Competition and Scale Economies, O32 - Management of Technological Innovation and R&D, C73 - Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
Year: 2009
DOI identifier: 10.2139/ssrn.1345748
OAI identifier: oai:mpra.ub.uni-muenchen.de:17658

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