Ruhr Economic Papers

Ruhr Economic Papers #485

Are Public and Private R&D Investments Complements or Substitutes?

by Anna Bohnstedt

University of Duisburg-Essen, 05/2014, 18 S./p., 8 Euro, ISBN 978-3-86788-551-5 DOI: 10.4419/86788551

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Abstract

We develop a general equilibrium model with heterogeneous firms à la Melitz (2003), where both the government and firms can invest into R&D to improve the country’s technological potential. A higher technological potential raises the average productivity of firms, thus implying lower consumer prices, and eventually leads to a welfare gain. The government’s public and firms’ private investments are modelled in a three-stage game, in which the government in the first stage invests into a basic research level, and then firms conduct private R&D building on this publicly provided “technology” in the second stage. We find that private R&D investments are hump-shaped with respect to the basic research level. For lower levels public and private investments are complements, while for higher levels they are substitutes.

JEL-Classification: O3, H4

Keywords: Heterogeneous firms; public and private R&D investments; basic research; innovation

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