This paper investigates government subsidy games for private sector research and development (R&D) in a two-country two-firm intra-industry trade model. Two funding structures are compared: “cost sharing” vs. “reward for performance.” Both the theoretical evidence and the results of a...

Most industrialized countries subsidize private sector R&D, even under some circumstances when the firm is owned by foreigners. The present paper, using a simple theoretical analysis of a monopoly firm selling only to the U.S. market, argues that such subsidies are welfare enhancing--as long, of...