Ugur, Mehmet ORCID: https://orcid.org/0000-0003-3891-3641 and Trushin, Eshref (2018) Asymmetric information and heterogeneous effects of R&D subsidies: evidence on R&D investment and employment of R&D personel. [Working Paper]

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Abstract

Public subsidies are expected to stimulate business R&D investment by correcting market failures. However, the existing evidence varies considerably and the causes of heterogeneous effect sizes remain largely unexplored. We draw on the theory of contracts to argue that effect-size heterogeneity is due to different levels of informational rents that heterogeneous firm types can extract in a second-best environment of asymmetric information, risk aversion and incomplete contracting. Using two estimators and a panel dataset of 43,650 R&D-active UK firms from 1998-2012, we report that the effect of the subsidy on innovation inputs (i) is smaller or even negative during economic downturns; (ii) is positive among start-ups, younger and smaller firms, but negative among older and larger firms; and (iii) follows an inverted-U pattern when evaluated against the firm’s R&D intensity. Our findings are consistent across two estimation methods (propensity score matching and double robust estimators) and two innovation inputs (privately-funded R&D investment and employment of scientists and technicians).

Item Type:	Working Paper
Uncontrolled Keywords:	Contract theory, treatment effect, R&D subsidy, innovation, additionality,
Subjects:	H Social Sciences > HD Industries. Land use. Labor
Faculty / School / Research Centre / Research Group:	Faculty of Business Faculty of Business > Institute of Political Economy, Governance, Finance and Accountability (IPEGFA) > Greenwich Political Economy Research Centre (GPERC)
Last Modified:	04 Aug 2021 16:33
URI:	http://gala.gre.ac.uk/id/eprint/21943

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