ntive to low-ball initial estimates and revise them with figures that go up (Mayer, 52) Contractors know that in order to win contracts they must promise big rewards at low prices, and that once the contract has been made more funding can be acquired at later stages. Many contracts awarded under this process are awarded on what is called a cost-plus basis. This notion is that the government and the contractor agree at the outset that the government will pay the costs incurred by the company related to the R&D, as well as a negotiated, fixed amount. In this way, before the project is even completed, the firm knows what its profit will be, which creates a disincentive to work to ensure a better product. This situation also creates inefficiency within the contracted firm, since they know that their costs will be paid there is little incentive for them to act efficiently.While the military does not use tax incentives or subsidies as often as contracts, it is important to note the costs and benefits surrounding them. Tax incentives are probably the most vague of the three types of government solutions to supplementing R&D. With tax incentives, the government gives tax credits for firms that participate in R&D and can show that their research will have some greater social benefit. There is an important cost associated with types of research that eventually receive tax credits, in that some of the social benefits that the companies claim to effecting are of marginal importance or value. It would cost a great deal to more carefully survey each company to make sure that its research is completely valid. Also, when firms choose the projects, they will most likely stay clear of projects involving long-term exploratory work that may yield high social benefits, opting instead to operate under the profit-motive and shorter-term projects. Tax credits are, however, a beneficial tool to stimulate R&D in the private sector in general, serving a...
