R&D investment decision and optimal subsidy

Jyh Bang Jou, Tan Lee

Research output: Chapter in Book/Report/Conference proceedingChapterpeer-review

2 Scopus citations


A firm facing technological uncertainty must decide whether to purchase research and development (R&D) capital at each instant. R&D capital exhibits both irreversibility and externality through the learning-by-doing effect. The combination of irreversibility and uncertainty drives agents to be more prudent, that is the maxim better safe than sorry applies. This maxim is more important as uncertainty is greater, technology progresses at a lower pace, the externality is stronger, or a catastrophic event is less likely to occur. A firm ignoring the externality will both invest later and disinvest earlier than a social planner who internalizes the externality. An equal rate of investment tax credits should be given to both costlessly reversible investments and irreversible ones, and the same rate of taxation should be imposed on disinvestment. Asset characteristics such as irreversibility and uncertainty are irrelevant to the optimal tax incentives. It can be shown that asset durability is also unrelated to the optimal tax incentives if allows capital to be depreciating at a constant exponential rate. Nevertheless, it is common for a government to give more generous tax credits to either short-lived assets such as equipment than long-lived assets such as structures or high-technology industries that use capital assets with either a higher expected growth pace of technology or greater degree of technological uncertainty.

Original languageEnglish
Title of host publicationReal R & D Options
PublisherElsevier Inc.
Number of pages23
ISBN (Print)9780750653329
StatePublished - Dec 2003


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