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

Date

2022-09-07

Advisors

Journal Title

Journal ISSN

ISSN

Volume Title

Publisher

Taylor and Francis

Type

Article

Peer reviewed

Yes

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.

Description

open access article

Keywords

economics of innovation, R&D subsidy, additionality, information asymmetry, risk aversion, entropy balancing, econometric impact evaluation

Citation

Ugur, M. and Trushin, E. (2022) Information asymmetry, risk aversion and R&D subsidies: effect-size heterogeneity and policy conundrums. Economics of Innovation and New Technology,

Rights

Research Institute

Institute for Applied Economics and Social Value (IAESV)