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Should We Oblige Firms to Invest in R&D? Knowledge Spillovers and the Market of 'Not to Invest in R&D Tradable Permits'

Firms’ research and development (R&D) investments are sources of positive externalities, thus justifying innovation policies based on a mix of R&D subsidies, tax credits and intellectual property rights. All those measures represent a way to encourage companies which invest in R&D by rewarding them. However, we show in this paper that a different approach can be envisaged. Following the logic advanced by Coase (1960), the problem of positive R&D externalities is of a reciprocal nature. Also, rather than rewarding firms which invest in R&D, it may also be possible to consider that it is their social duty to do so and that other firms have the legitimate right to benefit from R&D spillovers for free. This new approach emphasizes the responsibility of firms with respect to their R&D investments. It allows us to discuss an original policy measure aiming at internalizing R&D spillovers: A system of "not to invest in R&D tradable permits" in which firms would be endowed with R&D quotas which they could then trade, i.e. a firm wishing to invest less than its quota would have to buy a permit to another firm which invests more than its quota. A major interest of this system is that it would enable policy makers to choose with certainty the level of R&D effectively performed in the economy.