Abstract
Establishing a third-market model of international Cournot duopoly where home and foreign firms choose optimal R&D levels under demand uncertainty, this paper reexamines results on R&D subsidies proposed by Spencer and Brander [Review of Economic Studies 50 (1983): 707–722]. It is assumed that R&D subsidies consist of fixed and variable parts, demand uncertainty is of the additive type, and firms are risk averse. It is shown that signs of the effects of a change in a home fixed R&D subsidy are definitely determined, but those of a change in a home variable R&D subsidy are ambiguous, and, as a result, signs of optimal home R&D subsidies are also ambiguous even if the foreign R&D reaction curve is downward-sloping.
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