David R Collie (Cardiff Business School, Cardiff University)
(European Economy. Economic Papers. 231. July 2005.
Brussels. 14pp. Tab. Free.)
KC-AI-05-231-EN-C ISBN: 92-894-8870-0 ISSN: 1725-3187
The prohibition of state aid to investment and R&D in an integrated market such as the European Community is analysed in a Cournot oligopoly model where firms undertake investment or R&D to reduce their costs.
Both strategic and non-strategic investment and R&D are considered. Governments in the Member States give subsidies for investment and R&D, which are financed by distortionary taxation so the opportunity cost of government revenue exceeds unity.
Prohibiting state aid to investment will always increase aggregate welfare.
Prohibiting state aid to R&D will always increase aggregate welfare if spillovers from R&D are small.
If spillovers from R&D are moderate then there exists a range of values for opportunity cost where governments give state aid and where the prohibition of state aid will increase aggregate welfare.
Prohibiting state aid to R&D will reduce aggregate welfare if spillovers from R&D are large.