The impact of government subsidies on contract design of green technology R&D cooperation

Abstract

ABSTRACT Different types of government subsidies are used to promote green technology innovation in many countries. Driven by government subsidies and consumer green preference, it’s common for manufacturers (the marketer) to cooperate with research institutes (the innovator) in green technology research and development (R&D). Managing R&D collaboration under different government subsidies is a challenge for the marketer. Meanwhile, how can the government design the subsidy policies to achieve a better effect is also vital. Thus, a two-level three-player game is proposed. The upper layer is the government's decision on R&D subsidy or per-unit production subsidy, and the lower layer is a principal-agent model composed of a marketer and an innovator, who cooperate simply or deeply with a contract with or without milestone payment. We find that: (a) It is always advantageous for the marketer to offer a milestone payment after successful R&D; (b) Deep R&D cooperation is more profitable for the marketer; (c) R&D subsidy is better at stimulating the environmental performance of green technology cooperation.