Government financing of R&D: A mechanism design approach

Saul Lach, Zvika Neeman and Mark Schankerman

STICERD - Economics of Industry Papers from Suntory and Toyota International Centres for Economics and Related Disciplines, LSE

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 private venture capital firms. 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; entrepreneurship; additionality; government finance; venture capital (search for similar items in EconPapers)
JEL-codes: D61 D82 O32 O38 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-des, nep-ent, nep-ino, nep-ppm, nep-sbm and nep-tid
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://sticerd.lse.ac.uk/dps/ei/ei55.pdf (application/pdf)

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 (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cep:stieip:55

Access Statistics for this paper

More papers in STICERD - Economics of Industry Papers from Suntory and Toyota International Centres for Economics and Related Disciplines, LSE
Bibliographic data for series maintained by ().