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

David Besanko, Jian Tong, Jason Jianjun Wu

Research output: Contribution to journalArticle

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.

Original languageEnglish (US)
Pages (from-to)285-310
Number of pages26
JournalRAND Journal of Economics
Volume49
Issue number2
DOIs
StatePublished - Jun 1 2018

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ASJC Scopus subject areas

  • Economics and Econometrics

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