Working Paper Series
The “Incentive Subsidy” for Government Support of Private R&D
Abstract: An "incentive subsidy" policy for subsidizing private R &
D is proposed that can be more efficient, from a social point of view, than
subsidy policies in common use such as a "normal" subsidy policy (fixed
amount granted at project start), and conditional loans (loan is repaid
only if project is profitable). The incentive subsidy compensates firms for
any private loss and taxes away any gain in addition the firm receives a
small fraction of the resulting invention' s social value. This mechanism
comes close to being perfectly incentive compatible. The firm chooses
itself whether it wants to be covered under the incentive subsidy.
Generally, the firm's choice coincides with three social aims: First, a
project that the firm would conduct in any case should not be subsidized.
Second, a project should not be subsidized if its social value is negative.
Third, the subsidy should provide an incentive to maximize a project's
social value. Using a simulation over a range of hypothetical research
projects it is shown that the efficiency of conditional loans and normal
grants declines drastically as the government's information about project
parameters becomes poorer, while the incentive subsidy performs
Keywords: Subsidies; R&D; conditional loans; efficiency; social value; (follow links to similar papers)
JEL-Codes: H21; H23; O31; O38; (follow links to similar papers)
23 pages, December 1987
Before downloading any of the electronic versions below
you should read our statement on
for viewing Postscript files and the
Acrobat Reader for viewing and printing pdf files.
Full text versions of the paper:
Questions (including download problems) about the papers in this series should be directed to Elisabeth Gustafsson ()
Report other problems with accessing this service to Sune Karlsson ()
or Helena Lundin ().
Design by Joachim Ekebom