The Crowding Effects of Basic and Applied Research: A Theoretical and Empirical Analysis of an Agricultural Biotech Industry

Game theory is used to examine the incentives for private firms to fund applied research to improve differentiated crop varieties sold to compete with a public generic variety. We distinguish between applied research, modeled as a stochastic search process, and basic research, which improves applied research productivity. Propositions derived from the theoretical model are tested using empirical evidence from the canola crop research industry. The results show consistency between the analytical findings and the econometric results, supporting the validity of the framework and underlining the need to disaggregate the crowding effects of basic and applied public research. Copyright 2005, Oxford University Press.