Innovation Race, Politics, and Resource Misallocation

Abstract

Purpose - This paper aims to explain how politics can affect the innovation race in the private sector. Ideally, politics can help the economy develop or grow faster. However, it can slow the economy by obstructing the innovative activities of firms. The main objective of this paper is to examine how politics generates inefficiency and cost through Nash competition for political gain.
 Design/Methodology/Approach - This paper launches a game-theoretic approach to find the impact that political competition can leave upon an innovation race and R&D investments. It is modelled that private firms are involved non-cooperatively in a dynamic game for innovation. The strategic choices of R&D investment represent a subgame-perfect Nash equilibrium.
 Findings - Before an election, political parties tend to announce a commitment to supporting innovative activities for the private sector. It is ideal that the commitment helps firms establish R&D investment schedules as early as possible, and their innovation contributes to improving social welfare. However, political over-competition raises the problems of inconsistency or inefficiency.
 Research Implications - Public supportive programs can be designed to inspire innovative activities. However, public supportive programs can obstruct innovative activities and hurt social welfare through the misallocation of public resources. This paper can contribute to the research area of R&D and trade.