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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 ORCID: 0000-0001-9058-4262 (2022) Information asymmetry, risk aversion and R&D subsidies: effect-size heterogeneity and policy conundrums. Economics of Innovation and New Technology. pp. 1-26. ISSN 1043-8599 (In Press) (doi:https://doi.org/10.1080/10438599.2022.2119563)

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Abstract

Drawing on the theory of contracts and Schumpeterian models of innovation, we demonstrate that information asymmetry and risk aversion are conducive to effect-size heterogeneity and sub-optimal allocation of R&D subsidies. Utilising an unbalanced panel of 43,650 British firms from 1998 to 2012 and an entropy balancing methodology, we find that R&D subsidies are less likely to generate additionality effects when: (a) firms are larger, older, or more R&D-intensive; and (b) investment in basic research or during crisis episodes is considered. We also report that over 85% of the subsidies are allocated to large, old and R&D-intensive firms that do not deliver additional R&D investment. Our findings reveal a policy conundrum: the case for R&D subsidies is stronger during economic downturns, when R&D investment is in basic research and when firm age, size and R&D intensity reflect success in converting R&D investment into innovative product lines; but the subsidy is less likely to increase business R&D under these conditions.

Item Type: Article
Uncontrolled Keywords: R&D subsidy; additionality; information asymmetry; risk version; entropy balancing
Subjects: H Social Sciences > H Social Sciences (General)
Faculty / School / Research Centre / 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: 21 Sep 2022 12:37
URI: http://gala.gre.ac.uk/id/eprint/37527

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