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Information asymmetry, risk aversion and R&D subsidies: Effect-size heterogeneity and policy conundrums

Information asymmetry, risk aversion and R&D subsidies: Effect-size heterogeneity and policy conundrums

Ugur, Mehmet ORCID: 0000-0003-3891-3641 and Trushin, Eshref (2021) Information asymmetry, risk aversion and R&D subsidies: Effect-size heterogeneity and policy conundrums. In: Royal Economic Society (RES) 2021 Annual Conference, 12-14 April 2021, Virtual. (Submitted)

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Abstract

Drawing on the theory of contracts and Schumpeterian models of innovation, we argue that direct public support for business R&D may deliver sub-optimal outcomes if firms are risk-averse and have private information about their R&D productivity. Using observable proxies for risk aversion and R&D productivity, we report that the average treatment effect (ATT) in the sample of sample of 43,650 British firms is positive but highly heterogenous. The ATTs tend to be: (a) insignificant or negligible when the perceived risk of R&D investment is high due to crisis episodes or because of investment in basic research; (b) insignificant among larger and older firms and firms closer to the R&D frontier; and (c) positive and larger than the average among small and young firms and firms further away from the R&D frontier. Our findings point out to conundrums in the use of R&D subsidies as an innovation policy tool: The case for R&D subsidies is stronger during economic downturns, when the investment is in basic R&D and when firms have a higher probability of innovation success; but the subsidy is less likely to increase business R&D under these conditions.

Item Type: Conference or Conference Paper (Paper)
Uncontrolled Keywords: Treatment effect, R&D subsidy, innovation, additionality, entropy balancing, contract theory, Schumpeterian models
Subjects: H Social Sciences > HB Economic Theory
Faculty / Department / Research Group: Faculty of Business
Faculty of Business > Department of International Business & Economics
Faculty of Business > Institute of Political Economy, Governance, Finance and Accountability (IPEGFA)
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
Selected for GREAT 2016: None
Selected for GREAT 2017: None
Selected for GREAT 2018: None
Selected for GREAT 2019: None
Selected for REF2021: None
URI: http://gala.gre.ac.uk/id/eprint/32224

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