Government Subsidies of R&D in a Product Cycle Framework : U.S.-Japan Simulations

We examine the welfare effects of R&D subsidies using a product cycle model of trade between two developed countries. We simulate steady-state welfare in Japan and the U.S. for high- and low-skilled labor over different combinations of subsidy rates. Japanese subsidies to R&D usually benefit Americans due to an increase in product variety. However, because Japanese R&D reduces wages in the U.S. high-tech sector, American high-skilled workers are hurt if Japanese subsidies are too large. Large American subsidies may cause Japanese innovation to cease. However, Japanese steady-state welfare would be maximized in this case