This study introduces the degree of R&D cooperation as an endogenous in a duopoly with R&D subsidy and spillovers. We examine the subsidy policy and find that the optimal degree of R&D subsidy is a constant in order to maximize social total welfare. And the further analysis shows, under the best R&D subsidy and positive spillovers, the best R&D strategy for the firms in duopoly is R&D cooperation to maximize their profit and social total welfare. Furthermore, the greater is the technological spillovers, the greater should be the firm?s profit and social total welfare which the duopoly can gain from R&D cooperation.
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