R&D spillovers, output subsidies, and privatization in a mixed duopoly: Flexible versus irreversible R&D investments

Abstract This study examines firms’ decisions on cost‐reducing research and development (R&D) along with the government's output subsidy policy with research spillovers. We investigate flexible and irreversible R&D, where investment is sequentially chosen after the realization of output subsidy rate in the former and simultaneously chosen with the expectation of subsidy policy in the latter. We demonstrate that compared to irreversible R&D, output subsidy is larger (smaller) for relatively high (low) spillovers, and the welfare is always higher under flexible R&D. We also compare mixed and private duopolies and show that privatization increases (decreases) not only output subsidy but welfare in both cases when the spillovers rate is relatively low (high).

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