The effects of uncertainties over R&D policy or market demand on R&D levels

This paper investigates how product market uncertainty and government research and development (R&D) subsidy uncertainty affect R&D levels in a duopoly with R&D rivalry and technological spillovers from an advanced large firm. Within this framework, one small firm and one large firm compete on R&D and output. We find that if firms' R&D efforts are strategic complements, then the firms' R&D outputs would decrease due to increased uncertainty over R&D policy but would increase due to increased uncertainty over market demand. Thus, we conclude that different types of uncertainties exert different impacts on R&D investment decisions.