Brussels, 13 Jul 2005
The prohibition of state aid to investment and R&D in an integrated market such as the European Community is analysed in a Cournot oligopoly model where firms undertake investment or R&D to reduce their costs.
Both strategic and non-strategic investment and R&D are considered. Governments in the Member States give subsidies for investment and R&D, which are financed by distortionary taxation so the opportunity cost of government revenue exceeds unity.
- Prohibiting state aid to investment will always increase aggregate welfare.
- Prohibiting state aid to R&D will always increase aggregate welfare if spillovers
from R&D are small.
- If spillovers from R&D are moderate then there exists a range of values for
opportunity cost where governments give state aid and where the prohibition of state aid
will increase aggregate welfare.
- Prohibiting state aid to R&D will reduce aggregate welfare if spillovers from R&D are large.
Economic and Financial Affairs DG
Item source: http:///europa.eu.int/comm/economy_financ
e/publications/economic_papers/economicp apers231_en.htm
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