Competitiveness-shifting effects and the prisoners dilemma in international RandD subsidy wars

We analyze the incentives to subsidize RandD when there is an RandD leader and an RandD follower. Without government intervention, the RandD leader always achieves higher cost competitiveness than the RandD follower. In the presence of RandD subsidies, the country that hosts the RandD follower offers higher RandD subsidies than the country that hosts the RandD leader. As a result, competitiveness-shifting effects arise, since due to the RandD subsidy the RandD follower achieves higher cost competitiveness than the RandD leader. Consequently, the country that hosts the RandD follower does not face a prisoner?s dilemma in international subsidy wars, since even when the foreign country retaliates, it is always better off when it intervenes.