@article {35727,
	title = {Resource, Competition, and the Equilibrium Effects of Innovation Subsidies},
	journal = {Journal of Economic Behavior and Organization},
	volume = {224},
	year = {2024},
	pages = {297-322},
	abstract = {We study the equilibrium effects of innovation subsidies that reduce firms{\textquoteright}\&nbsp;innovation costs in a monopolistic competition model with firm heterogeneity in innovation capabilities and an industry-level resource constraint.\&nbsp;Subsidies change product market competition and resource price, and\&nbsp;further affect firms{\textquoteright} innovation. We show a counterintuitive result:\&nbsp;though subsidies lower innovation costs, high-capability firms may reduce\&nbsp;their innovation. This finding implies that the demand curve for innovation investments of certain firms in equilibrium can be locally upward-sloping. We show that at the\&nbsp;industry level, both average innovation input and output demonstrate\&nbsp;inverted-U shaped responses to increasing subsidies but with differing\&nbsp;turning points. Notably, an increase in average innovation input may be\&nbsp;accompanied by a decrease in average innovation output. These findings cast\&nbsp;doubts on the interpretation of existing empirical evidences on firm and\&nbsp;industry responses to innovation subsidies, most of which assume away\&nbsp;treatment effect heterogeneity and\&nbsp;equilibrium feedbacks.},
	url = {https://www.sciencedirect.com/science/article/pii/S0167268124001896},
	author = {Larry D. Qiu and Xu Wei and Mohan Zhou and Yi Zhou}
}
