State aid to investment and R&D -- European Economy Paper No. 231 (link)

July 14, 2005

Brussels, 13 Jul 2005

Full text

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 Previous Item Back to Titles Print Item

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