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Cover of: The Differential Impact of Subsidies on Product Improvements
Ralph B. Siebert

The Differential Impact of Subsidies on Product Improvements

Section: Articles
Volume 175 (2019) / Issue 4, pp. 583-616 (34)
Published 22.07.2019
DOI 10.1628/jite-2019-0038
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  • 10.1628/jite-2019-0038
Summary
We consider a government that can promote innovation by providing subsidies to different firms. We find that providing a subsidy to only the high-quality firms returns the highest net total surplus and net consumer surplus, even though it resultsin the highest product prices and serves the fewest customers in the market. High-quality product customers are more adversely affected than low-quality ones. In terms of product variety, we show that innovators always withdraw their former products from the market. Finally, the high-quality firm has a higher incentive to hinder the low-quality firm from receiving a subsidy than vice versa.