Abstract
We discuss stochastic cost-reducing R&D investments and examine efficient subsidies. We discuss a two-stage duopoly model in which each firm chooses R&D levels (innovation size and probability of success) in the first stage and competes a la Cournot in the second stage. We find that simple subsidies depending on the realized cost differences induce the efficient levels of R&D with respect to the innovation size and probability of success by two firms regardless of ex ante and ex post asymmetries between the two firms.
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