Analysis on the Impact of Government Policies towards Technological Innovation Using Evolutionary Game Theory

Most of the increased productivity and social wealth in the world over the recent decades can be traced largely to technological innovation. Governments encourage firms’ innovation by providing R&D subsidies and other measures. At the same time, governments regulate technological advancement from the social safety standpoint through various legal and/or institutional measures. Typically, product liability scheme is legislated to assure that these advances do not pose a risk of harm to public. However, there is a public debate that product liability imposes costs that hit new products particularly hard, thus reducing firm’s incentives to innovate and their willingness to bear risk. This research attempts to describe the government policies – innovation linkage as a quantitative model. In particular, this research employs Evolutionary Game Theory to model and simulate the dynamic behavior of the system where governments interact over the time with firms, then analyzes the impacts of typical government policies, i.e. product liability law and R&D subsidies. The results show some useful implications to achieve balanced policy goals between public safety and technological advancement.