Information asymmetry, risk aversion and R&D subsidies: effect-size heterogeneity and policy conundrums

Mehmet Ugur () and Eshref Trushin

Economics of Innovation and New Technology, 2023, vol. 32, issue 8, 1190-1215

Abstract: Drawing on the theory of contracts and Schumpeterian models of innovation, we demonstrate that information asymmetry and risk aversion are conducive to effect-size heterogeneity and sub-optimal allocation of R&D subsidies. Utilising an unbalanced panel of 43,650 British firms from 1998 to 2012 and an entropy balancing methodology, we find that R&D subsidies are less likely to generate additionality effects when: (a) firms are larger, older, or more R&D-intensive; and (b) investment in basic research or during crisis episodes is considered. We also report that over 85% of the subsidies are allocated to large, old and R&D-intensive firms that do not deliver additional R&D investment. Our findings reveal a policy conundrum: the case for R&D subsidies is stronger during economic downturns, when R&D investment is in basic research and when firm age, size and R&D intensity reflect success in converting R&D investment into innovative product lines; but the subsidy is less likely to increase business R&D under these conditions.

Date: 2023
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Working Paper: Information asymmetry, risk aversion and R&D subsidies: Effect-size heterogeneity and policy conundrums (2021)
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DOI: 10.1080/10438599.2022.2119563

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