Government financing of R&D: a mechanism design approach

Saul Lach, Zvika Neeman and Mark Schankerman

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We study how to design an optimal government loan program for risky R&D projects with positive externalities. With adverse selection, the optimal government contract involves a high interest rate but nearly zero cofinancing by the entrepreneur. This contrasts sharply with observed loan schemes. With adverse selection and moral hazard, allowing for two levels of effort by the entrepreneur, the optimal policy consists of a menu of at most two contracts, one with high interest and zero self-financing and a second with a lower interest plus cofinancing. Calibrated simulations assess welfare gains from the optimal policy, observed loan programs, and a direct subsidy to private venture capital firms. The gains vary with the size of the externalities, the cost of public funds, and the effectiveness of the private venture capital industry.

Keywords: Mechanism design; Innovation; R&D; Entrepreneurship; Additionality; Government finance; Venture capital (search for similar items in EconPapers)
JEL-codes: D82 D86 G24 G32 H81 O31 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2021-08-01
New Economics Papers: this item is included in nep-cfn, nep-des, nep-ino, nep-knm, nep-mac, nep-ppm and nep-sbm
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Citations: View citations in EconPapers (3)

Published in American Economic Journal: Microeconomics, 1, August, 2021, 13(3), pp. 238 - 272. ISSN: 1945-7669

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Related works:
Journal Article: Government Financing of R&D: A Mechanism Design Approach (2021)
Working Paper: Government financing of R&D: A mechanism design approach (2020)
Working Paper: Government Financing of R&D: A Mechanism Design Approach (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:105873

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