R&D and subsidy policy with imperfect project classification

Thomas Gehrig and Rune Stenbacka

Economics Letters, 2023, vol. 222, issue C

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.

Keywords: Imperfect screening; R&D; Subsidy policy (search for similar items in EconPapers)
JEL-codes: D83 H25 H83 L52 (search for similar items in EconPapers)
Date: 2023
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Working Paper: R&D and Subsidy Policy with Imperfect Project Classification (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:222:y:2023:i:c:s0165176522004402

DOI: 10.1016/j.econlet.2022.110966

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