R&D versus output subsidies in mixed markets

We analyse the relative welfare effects of an R&D and an output subsidy in a mixed duopoly. We show that an R&D subsidy is beneficial for society as a whole, and socially superior to an output subsidy, when spillovers are sufficiently high. Otherwise, an output subsidy is socially superior.

► We consider a mixed duopoly with R&D or output subsidies. ► We analyse the relative welfare effects of the two subsidy schemes. ► An output subsidy is socially superior to an R&D subsidy if spillovers are low. ► An R&D subsidy is socially superior to an output subsidy if spillovers are high.