Subsidizing research programs with “if†and “when†uncertainty in the face of severe informational constraints

David Besanko, Jian Tong and Jason Jianjun Wu

RAND Journal of Economics, 2018, vol. 49, issue 2, 285-310

Abstract: We study subsidy policies for research programs when firms have private information about the likelihood of project viability, but the government cannot form a unique prior about this likelihood. When the shadow cost of public funds is zero, first†best welfare can be attained as a (belief†free) ex post equilibrium under both monopoly and competition, but it cannot be attained when the shadow cost is positive. However, max†min subsidy policies exist under monopoly and competition and consist of pure matching subsidies. Under a Research and Development (R&D) consortium, the highest max†min matching rate is lower than under competition, and R&D investment intensity is higher.

Date: 2018
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