The "Matthew Effect" in R&D Public Subsidies: the Italian Evidence

Public policy plays a key role in supporting R&D activities and a variety of policy tools have been applied to contrast the undersupply of technological knowledge including the provision of subsidies to private firms performing R&D activities. A large literature has identified the sources of ‘government failures’ in discretionary procedures in problems related to asymmetric information and the operation of interest groups. This paper explores the causes and effects of persistence in the discretionary allocation of public subsidies to R&D activities performed by private firms and elaborates a crucial distinction between vicious Matthew-effects and virtuous Matthew-effects. The latter identifies the role of dynamics increasing returns based upon accumulation of competence stemming from learning, learning to learn and knowledge cumulability. On the contrary vicious Matthew-effects lead to substitution of private funds with public ones and represent an additional source of ‘government failure’ which has not been specifically addressed by previous literature. The empirical analysis based upon Transition Probability Matrices, Probit regression and Propensity Score Matching tested the relevance of these arguments on a sample of about 750 Italian firms in the years 1998-2003. Our results show that the persistence in the discretionary allocation of public subsidies is relevant and that virtuous Matthew-effects prevail when a ‘picking the winner strategy’ is adopted by granting authorities. We conclude that while the decision to rely on discretionary incentives based on beauty context selection procedures may imply relevant costs, their benefits can be increased by pursuing a ‘picking the winner strategy