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Market failures and the additionality effects of public support to private R&D: Theory and empirical implications

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  • Takalo, Tuomas
  • Tanayama, Tanja
  • Toivanen, Otto

Abstract

We extend the theoretical basis of the empirical literature on the effects of R&D subsidies by providing an estimable model of strategic interaction among subsidy applicants, and public and private sector R&D financiers. Our model incorporates fixed R&D costs and a cost of external finance. We derive the optimal support rule. At the intensive (extensive) margin the costs of external funding reduce (increase) the optimal subsidy rate. We also establish necessary and sufficient conditions for the existence of additionality. It turns out that additionality at the intensive margin is less likely with large spillovers. Our results suggest that the relationship between additionality and welfare may not be straightforward.

Suggested Citation

  • Takalo, Tuomas & Tanayama, Tanja & Toivanen, Otto, 2013. "Market failures and the additionality effects of public support to private R&D: Theory and empirical implications," Bank of Finland Research Discussion Papers 2/2013, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2013_002
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    1. Liliana Gelabert & Andrea Fosfuri & Josep A. Tribó, 2009. "Does The Effect Of Public Support For R&D Depend On The Degree Of Appropriability?," Journal of Industrial Economics, Wiley Blackwell, vol. 57(4), pages 736-767, December.
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    More about this item

    Keywords

    R&D; entrepreneurial finance; R&D subsidies; innovation policy;
    All these keywords.

    JEL classification:

    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • L32 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Public Enterprises; Public-Private Enterprises
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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