Information asymmetry, risk aversion and R&D subsidies: Effect-size heterogeneity and policy conundrums
Mehmet Ugur () and
No 32224, Greenwich Papers in Political Economy from University of Greenwich, Greenwich Political Economy Research Centre
Drawing on the theory of contracts and Schumpeterian models of innovation, we argue that direct public support for business R&D may deliver sub-optimal outcomes if firms are risk-averse and have private information about their R&D productivity. Using observable proxies for risk aversion and R&D productivity, we report that the average treatment effect (ATT) in the sample of sample of 43,650 British firms is positive but highly heterogenous. The ATTs tend to be: (a) insignificant or negligible when the perceived risk of R&D investment is high due to crisis episodes or because of investment in basic research; (b) insignificant among larger and older firms and firms closer to the R&D frontier; and (c) positive and larger than the average among small and young firms and firms further away from the R&D frontier. Our findings point out to conundrums in the use of R&D subsidies as an innovation policy tool: The case for R&D subsidies is stronger during economic downturns, when the investment is in basic R&D and when firms have a higher probability of innovation success; but the subsidy is less likely to increase business R&D under these conditions.
Keywords: Treatment effect; R&D subsidy; innovation; additionality; entropy balancing; contract theory; Schumpeterian models (search for similar items in EconPapers)
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