Sunk Costs, Extensive R&D Subsidies and Permanent Inducement Effects

Pere Arqué-Castells and Pierre Mohnen

Journal of Industrial Economics, 2015, vol. 63, issue 3, 458-494

Abstract: type="main">

Using firm-level data on Spanish manufacturing firms we estimate a model of the firm's optimal R&D decisions (whether to perform R&D and how much to invest). We quantify the fixed (proper fixed costs plus firms' outside option) and sunk costs of R&D and find the former to be substantially higher than the latter. While sunk costs act as a barrier to entry into R&D for some firms, fixed costs are the binding obstacle for many more firms. Simulation based on the estimated model reveals that one-shot trigger subsidies cause a substantial increase in both the share of R&D firms and average R&D expenditures. This effect shows persistence over time, but totally fades away after seven years as firms are gradually hit by negative R&D profitability shocks.

Date: 2015
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Working Paper: Sunk costs, extensive R&D subsidies and permanent inducement effects (2012)
Working Paper: Sunk costs, extensive R&D subsidies and permanent inducement effects (2012)
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