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Asymmetric information and heterogeneous effects of R&D subsidies: evidence on R&D investment and employment of R&D personel

Mehmet Ugur () and Eshref Trushin

No 21943, Greenwich Papers in Political Economy from University of Greenwich, Greenwich Political Economy Research Centre

Abstract: Public subsidies are expected to stimulate business R&D investment by correcting market failures. However, the existing evidence varies considerably and the causes of heterogeneous effect sizes remain largely unexplored. We draw on the theory of contracts to argue that effect-size heterogeneity is due to different levels of informational rents that heterogeneous firm types can extract in a second-best environment of asymmetric information, risk aversion and incomplete contracting. Using two estimators and a panel dataset of 43,650 R&D-active UK firms from 1998-2012, we report that the effect of the subsidy on innovation inputs (i) is smaller or even negative during economic downturns; (ii) is positive among start-ups, younger and smaller firms, but negative among older and larger firms; and (iii) follows an inverted-U pattern when evaluated against the firm’s R&D intensity. Our findings are consistent across two estimation methods (propensity score matching and double robust estimators) and two innovation inputs (privately-funded R&D investment and employment of scientists and technicians).

Keywords: Contract theory; treatment effect; R&D subsidy; innovation; additionality (search for similar items in EconPapers)
Date: 2018-10-16
New Economics Papers: this item is included in nep-cse, nep-cta, nep-eur, nep-ino, nep-sbm and nep-tid
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