International Competition In Research And Development; Incentives To Subsidize And Retaliate

Is laissez faire optimal in international trade under conditions of imperfect competition? Possible economic profits may tempt governments to intervene in trade in order to enhance the national income. An intriguing intervention is subsidizing a firms research and development (R&D) efforts. This paper presents Bertrand competitors, in an international duopoly, who invest in R&D directed towards process innovation. Ironically, a subsidy may not be welfare-enhancing