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Subsidizing research programs with “if†and “when†uncertainty in the face of severe informational constraints

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  • David Besanko
  • Jian Tong
  • Jason Jianjun Wu

Abstract

We study subsidy policies for research programs when firms have private information about the likelihood of project viability, but the government cannot form a unique prior about this likelihood. When the shadow cost of public funds is zero, first†best welfare can be attained as a (belief†free) ex post equilibrium under both monopoly and competition, but it cannot be attained when the shadow cost is positive. However, max†min subsidy policies exist under monopoly and competition and consist of pure matching subsidies. Under a Research and Development (R&D) consortium, the highest max†min matching rate is lower than under competition, and R&D investment intensity is higher.

Suggested Citation

  • David Besanko & Jian Tong & Jason Jianjun Wu, 2018. "Subsidizing research programs with “if†and “when†uncertainty in the face of severe informational constraints," RAND Journal of Economics, RAND Corporation, vol. 49(2), pages 285-310, June.
    • Handle: RePEc:bla:randje:v:49:y:2018:i:2:p:285-310
    DOI: 10.1111/1756-2171.12227
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    Cited by:

    1. Gehrig, Thomas & Stenbacka, Rune, 2023. "R&D and subsidy policy with imperfect project classification," Economics Letters, Elsevier, vol. 222(C).
    2. Rainer Widmann, 2023. "The Behavioral Additionality of Government Research Grants," Rationality and Competition Discussion Paper Series 417, CRC TRR 190 Rationality and Competition.
    3. Liliana Gelabert & Martín Pereyra & Flavia Roldán, 2021. "Public support prevalence and innovation behavior. Uruguay 2007-2015," Documentos de Investigación 127, Universidad ORT Uruguay. Facultad de Administración y Ciencias Sociales.

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