International Cournot duopoly and R&D subsidies under demand uncertainty

Establishing a third-market model of international Cournot duopoly where home and foreign firms choose optimal R&D levels under demand uncertainty. this paper re examines results on R&D subsidies proposed by Spencer and Brander [Review of Economic Studies 50(1983): 707-722]. It is assumed that R&D subsidies consist of fixed and variable parts. demand uncertainty is of the additive type, and firms are risk averse. It is shown that signs of the effects of a change in a home fixed R&D subsidy are definitely determined. but those of a change in a home variable R&D subsidy are ambiguous. and. as a result. signs of optimal home R&D subsidies are also ambiguous even if the foreign R&D reaction curve is downward-sloping.