Government Subsidies as a Risk-Sharing Policy Tool in Innovation Investment

Hao Lu, Claudia De Fuentes, Joniada Milla () and Soheil Ahmadi
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Hao Lu: Saint Mary’s University
Claudia De Fuentes: Saint Mary’s University
Joniada Milla: Saint Mary’s University
Soheil Ahmadi: Saint Mary’s University

No 15725, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Current literature on the impact assessment of government innovation subsidies is mainly empirical driven and lacks an overarching theoretical model to explain the conditions under which government subsidies create positive additionalities on private R&D investment. In this paper, we present a theoretical model that treats government subsidies as a risk-sharing vehicle for private R&D activities. More importantly, we argue that positive additionalities will be more likely to occur when the subsidies are allocated based on the risk-reward condition of the project. In addition, we show that the risk-sharing effect of government subsidies is influenced by a firm's absorptive capacity and the asset specificity of the project. By showing the conditions under which subsidies create positive additionality, we provide guidance to policymakers on how to improve the effectiveness of government support for innovation.

Keywords: government subsidy; additionality; R&D and innovation; the risk-sharing model; absorptive capacity; asset specificity (search for similar items in EconPapers)
JEL-codes: D50 H81 O31 O38 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2022-11
New Economics Papers: this item is included in nep-ino and nep-tid
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