Are Public and Private R & D Investments Complements or Substitutes ? # 485

We develop a general equilibrium model with heterogeneous fi rms à la Melitz (2003), where both the government and fi rms can invest into R&D to improve the country’s technological potential. A higher technological potential raises the average productivity of fi rms, thus implying lower consumer prices, and eventually leads to a welfare gain. The government’s public and fi rms’ private investments are modelled in a three-stage game, in which the government in the fi rst stage invests into a basic research level, and then fi rms conduct private R&D building on this publicly provided “technology” in the second stage. We fi nd that private R&D investments are hump-shaped with respect to the basic research level. For lower levels public and private investments are complements, while for higher levels they are substitutes. JEL Classifi cation: O3, H4