Government R&D subsidies as a signal for private investors |
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| Authors: | Robin Kleer |
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| Institution: | 1. ICN Business School, Department of Strategy and Entrepreneurship, 3 Place Edouard Branly, 50070 Metz Technopole, France;2. Bureau d’Économie Théorique et Appliquée (BETA), UMR CNRS 7522, Université de Lorraine, France;3. ICN Business School, Department of Human Resource Management and Organizational Behavior, 13 Rue Michel Ney, 54000 Nancy, France;4. Maastricht University, School of Business and Economics, Department of Economics, Tongersestraat 53, 6200 MD Maastricht, Netherlands;5. Aarhus University, Tuborg Research Centre for Globalization and Firms, Fuglesangs Allé 4, 8210 Aarhus V., Denmark;6. University of Passau, Faculty of Business Administration and Economics, Chair of International Economics, Dr.-Hans-Kapfinger-Str. 14b, 94032 Passau, Germany;1. ZEW Centre for European Economic Research, Mannheim, Germany;2. Maastricht University, The Netherlands;3. University of Luxembourg, Luxembourg;4. K.U Leuven, Department of Managerial Economics, Strategy and Innovation, Belgium;1. TUM School of Management, Technische Universität München, Germany;2. Dept. of Managerial Economics, Strategy and Innovation, K.U. Leuven, Belgium;3. School of Business and Economics, Maastricht University, The Netherlands;4. Centre for European Economic Research (ZEW), Mannheim, Germany;5. Bruegel, Brussels, Belgium;6. CEPR, London, United Kingdom;1. University of Nice Sophia-Antipolis, Nice F-06000, France;2. CNRS, GREDEG UMR 7321, Valbonne F-06560, France;3. CONICET – IELDE, National University of Salta, Av. Bolivia 5150 (A4408FVY), Salta, Argentina;1. Manchester Accounting and Finance Group, Manchester Business School, Crawford House, Oxford Road, Manchester M13 9PL, United Kingdom;2. Manchester Accounting and Finance Group, Manchester Business School, Room 6.21, Harold Hankins Building, Booth Street West, Manchester M13 9QH, United Kingdom;3. School of Economics, Finance, and Management, University of Bristol, Social Sciences Complex, 8 Woodland Road, Clifton BS8 1TN, United Kingdom |
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| Abstract: | Government subsidies for R&D are intended to promote projects with high returns to society but too little private returns to be beneficial for private investors. This may be caused by spillovers or a low appropriability rate. Apart from the direct funding of these projects, government grants may serve as a signal for good investments for private investors. We use a simple signaling model with different types of R&D projects to capture this phenomenon. The agency has a preference for basic research projects as they promise high expected social returns, while banks prefer applied research projects with high private returns. In a setup where the subsidy can only be used to distinguish between basic and applied research projects, government agency’s signal is not very helpful for banks. However, if the subsidy is accompanied by a quality signal, it can lead to increased or better selected private investments. |
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