Abstract
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 language | English |
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Pages (from-to) | 161-175 |
Number of pages | 15 |
Journal | Journal of Regulatory Economics |
Volume | 7 |
Issue number | 2 |
DOIs | |
Publication status | Published - Mar 1995 |
Externally published | Yes |
Keywords
- public finance
- industrial organization
- incentive scheme
- simple condition
- past performance