Welfare-reducing discriminatory output subsidies with mixed ownership and R&D

This study examines the welfare-reducing effect of time-consistent discriminatory output subsidies under duopolistic R&D competition with a semi-public firm. Contrary to the committed case with mixed ownership, we find that the private firm invests more in R&D than the semi-public firm to induce the government to grant higher subsidy, which results in higher output production than the semi-public firm. We also show that optimal discriminatory subsidy rates are higher (lower) than uniform subsidy rates for a sufficiently high (low) degree of privatization, which could decrease (increase) social welfare.