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

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

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.

Research and development, subsidies, dynamic stochastic games, asymmetric information, belief-free games, social cost of public funds
0741-6261
285-310
Besanko, David
f883b3af-f490-4125-b05e-5a047a56d8e2
Tong, Jian
8109179b-ff1d-483e-9ee0-bf3f96cda71b
Wu, Jason Jianjun
5bf02340-55a2-4e8d-a700-6b134bb9a609
Besanko, David
f883b3af-f490-4125-b05e-5a047a56d8e2
Tong, Jian
8109179b-ff1d-483e-9ee0-bf3f96cda71b
Wu, Jason Jianjun
5bf02340-55a2-4e8d-a700-6b134bb9a609

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.

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Subsidizing_Research_Programs_With_Severe_Information_Constraints_October 2017 - Accepted Manuscript
Restricted to Repository staff only until 16 January 2020.
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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

Identifiers

Local EPrints ID: 415842
URI: https://eprints.soton.ac.uk/id/eprint/415842
ISSN: 0741-6261
PURE UUID: 37101a8e-6e08-4f8d-b272-58cb67d2631e
ORCID for Jian Tong: ORCID iD orcid.org/0000-0001-9367-4853

Catalogue record

Date deposited: 24 Nov 2017 17:31
Last modified: 14 Mar 2019 01:46

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Contributors

Author: David Besanko
Author: Jian Tong ORCID iD
Author: Jason Jianjun Wu

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