Subsidizing research programs with “if” and “when” uncertainty in the face of severe informational constraints

Besanko, David, Tong, Jian and Wu, Jason Jianjun (2018) Subsidizing research programs with “if” and “when” uncertainty in the face of severe informational constraints. The Rand Journal of Economics, 49 (2), 285-310. (doi:10.1111/1756-2171.12227).

Record type: Article

Abstract

We study subsidy policies for research programs when firms have private information about the likelihood of project viability, but the government cannot form a unique prior about this likelihood. When the shadow cost of public funds is zero, first-best welfare can be attained as a (belief-free) ex post equilibrium under both monopoly and competition, but it cannot be attained when the shadow cost is positive. However, max-min subsidy policies exist under monopoly and competition and consist of pure matching subsidies. Under a Research and Development (R&D) consortium, the highest max-min matching rate is lower than under competition, and R&D investment intensity is higher.

Text

Subsidizing_Research_Programs_With_Severe_Information_Constraints_October 2017 - Accepted Manuscript

Available under License University of Southampton Accepted Manuscript Licence.

Download (329kB)

More information

Accepted/In Press date: 16 October 2017

e-pub ahead of print date: 2 May 2018

Published date: 1 June 2018

Additional Information: Associated publication: Besanko, D., Tong, J., & Wu, J. (2016). Subsidizing research programs with "if" and "when" uncertainty in the face of severe informational constraints. (Discussion Papers in Economics and Econometrics; No. 1605). Southampton, GB: University of Southampton.

Keywords: Research and development, subsidies, dynamic stochastic games, asymmetric information, belief-free games, social cost of public funds