Incremental R&D subsidies

Martin Richardson, Simon Wilkie

Research output: Contribution to journalArticleResearchpeer-review

5 Citations (Scopus)


An Incremental Incentive Scheme (IIS) encourages some activity by rewarding an agent for overachieving a base level determined by past performance but not penalizing underachievement. We examine an IIS R&D subsidy in a dynamic model due to Grossman and Shapiro (1986). We show that the firm's optimal R&D path either cycles around the no-subsidy path or follows a "ratchet" pattern of small increases in R&D relative to the no-subsidy path. A simple condition determines which type of behavior occurs. Furthermore, we show that an IIS may be an inefficient method of encouraging R&D compared to a flat-rate subsidy.

Original languageEnglish
Pages (from-to)161-175
Number of pages15
JournalJournal of Regulatory Economics
Issue number2
Publication statusPublished - Mar 1995
Externally publishedYes


  • public finance
  • industrial organization
  • incentive scheme
  • simple condition
  • past performance

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