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Government Subsidies as a Risk-Sharing Policy Tool in Innovation Investment

Author

Listed:
  • Lu, Hao

    (Saint Mary’s University)

  • De Fuentes, Claudia

    (Saint Mary’s University)

  • Milla, Joniada

    (Saint Mary’s University)

  • Ahmadi, Soheil

    (Saint Mary’s University)

Abstract

Current literature on the impact assessment of government innovation subsidies is mainly empirical driven and lacks an overarching theoretical model to explain the conditions under which government subsidies create positive additionalities on private R&D investment. In this paper, we present a theoretical model that treats government subsidies as a risk-sharing vehicle for private R&D activities. More importantly, we argue that positive additionalities will be more likely to occur when the subsidies are allocated based on the risk-reward condition of the project. In addition, we show that the risk-sharing effect of government subsidies is influenced by a firm's absorptive capacity and the asset specificity of the project. By showing the conditions under which subsidies create positive additionality, we provide guidance to policymakers on how to improve the effectiveness of government support for innovation.

Suggested Citation

  • Lu, Hao & De Fuentes, Claudia & Milla, Joniada & Ahmadi, Soheil, 2022. "Government Subsidies as a Risk-Sharing Policy Tool in Innovation Investment," IZA Discussion Papers 15725, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp15725
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    More about this item

    Keywords

    government subsidy; additionality; R&D and innovation; the risk-sharing model; absorptive capacity; asset specificity;
    All these keywords.

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy

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