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R&D and subsidy policy with imperfect project classification

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  • Gehrig, Thomas
  • Stenbacka, Rune

Abstract

We characterize optimal subsidies for firms facing limitations in their ability to correctly classify risky R&D projects. We demonstrate that the optimal subsidy is an increasing function of firms’ ability to reduce type-I errors in accepting projects with a success potential, and a decreasing function in their type-II error of adopting projects with no success potential. Moreover, the optimal subsidy is decreasing in the informational advantage regarding the assessment of project viability of private firms relative to the government.

Suggested Citation

  • Gehrig, Thomas & Stenbacka, Rune, 2023. "R&D and subsidy policy with imperfect project classification," Economics Letters, Elsevier, vol. 222(C).
    • Handle: RePEc:eee:ecolet:v:222:y:2023:i:c:s0165176522004402
    DOI: 10.1016/j.econlet.2022.110966
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    1. Saul Lach & Zvika Neeman & Mark Schankerman, 2021. "Government Financing of R&D: A Mechanism Design Approach," American Economic Journal: Microeconomics, American Economic Association, vol. 13(3), pages 238-272, August.
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    4. Dirk Czarnitzki & Andrew Toole, 2007. "Business R&D and the Interplay of R&D Subsidies and Product Market Uncertainty," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 31(3), pages 169-181, November.
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    6. Ben R. Martin, 2016. "R&D policy instruments -- a critical review of what we do and don’t know," Industry and Innovation, Taylor & Francis Journals, vol. 23(2), pages 157-176, February.
    7. Sabrina T. Howell, 2017. "Financing Innovation: Evidence from R&D Grants," American Economic Review, American Economic Association, vol. 107(4), pages 1136-1164, April.
    8. 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.
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    More about this item

    Keywords

    Imperfect screening; R&D; Subsidy policy;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H83 - Public Economics - - Miscellaneous Issues - - - Public Administration
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods

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