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On subsidization of investments in R&D and production capacity

Author

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  • Ketelaars, Martijn W.
  • Kort, Peter M.

Abstract

This article considers a sequential investment project which starts with a product innovation phase, and subsequently, once R&D is completed, a production phase. The investment decisions are the timing and size of the R&D investment, and the size of the production capacity. We show that from a social welfare perspective the firm starts the R&D project too late and installs a too low production capacity. We find that subsidization of the R&D investment is more effective in reducing this welfare loss than subsidization of the production capacity. In fact, we reach the same conclusion under both isoelastic and linear demand.

Suggested Citation

  • Ketelaars, Martijn W. & Kort, Peter M., 2025. "On subsidization of investments in R&D and production capacity," European Journal of Operational Research, Elsevier, vol. 321(3), pages 1036-1054.
    • Handle: RePEc:eee:ejores:v:321:y:2025:i:3:p:1036-1054
    DOI: 10.1016/j.ejor.2024.10.021
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    More about this item

    Keywords

    Investment analysis; Research and development; Subsidies; Welfare; Real options;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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