| We analyze the incentives to subsidize R&D when there is an R&D leader and an R&D follower. Without government intervention, the R&D leader always achieves higher cost competitiveness than the R&D follower. In the presence of R&D subsidies, the country that hosts the R&D follower offers higher R&D subsidies than the country that hosts the R&D leader. As a result, competitiveness-shifting effects arise, since due to the R&D subsidy the R&D follower achieves higher cost competitiveness than the R&D leader. Consequently, the country that hosts the R&D follower does not face a prisoner?s dilemma in international subsidy wars, since even when the foreign country retaliates, it is always better off when it intervenes. |
Abstract
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