Policy towards R&D cooperation and industry evolution

In this paper we theoretically explore the effects of different types of financial intervention in supporting R&D cooperation in the context of a dynamic model of network formation and industry evolution. We consider two kinds of policies. In the first case, the policy maker subsidies the formation of a R&D agreement when such a link increases social welfare in the period (we call this rule a myopic social welfare maximizing rule). In the second case, the policy maker pays a fixed subsidy for each link maintained by the firm. We find that, while the myopic social welfare maximizing rule has limited (although positive) effect in terms of industry evolution and social welfare, fixed subsidies have a significant impact, with a long lasting effect on market structure (i.e., concentration decreases). The result of a limited effect of a social welfare maximizing rule is due to the fact that within the period private and social interests in link formation basically coincide. On the contrary, fixed subsidies lead the formation of links that, although unprofitable on a myopic base, allow the self-reinforcing mechanism for which newly created knowledge can be used as input for new agreements.