Government Financing of R&D: A Mechanism Design Approach

Mark Schankerman, Saul Lach and Zvika Neeman

No 12199, CEPR Discussion Papers from Centre for Economic Policy Research

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 co-financing by the entrepreneur. This contrasts sharply with observed loan schemes. With adverse selection and moral hazard (two effort levels), 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 co-financing. Calibrated simulations assess welfare gains from the optimal policy, observed loan programs, and a direct subsidy to the private venture capital market. The gains vary with the size of the externalities, cost of public funds, and effectiveness of the private VC industry.

Keywords: Mechanism design; Innovation; R&d; Start-ups; entrepreneurship; Additionality; Government finance (search for similar items in EconPapers)
JEL-codes: D61 D82 O32 O38 (search for similar items in EconPapers)
Date: 2017-11
New Economics Papers: this item is included in nep-cse, nep-cta, nep-des, nep-ent, nep-ino, nep-knm, nep-mic, nep-ppm and nep-sbm
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Citations: View citations in EconPapers (7)

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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 (2021)
Working Paper: Government financing of R&D: A mechanism design approach (2020)
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