Miguel González-Maestre, Luis Granero
This paper deals with the role of basic R&D investment in vertical markets where an incumbent owner of a basic technological input faces potential competition. We show that the socially optimal investment in basic research is the maximum level of this variable such that this basic R&D effort, in fact, is never applied. Our main insight is that there is a role for public investment in R&D that seems to have been overlooked in the literature. This role is based on the idea that basic R&D can make the potential development of alternative technologies credible by reducing their implementation costs.
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