Research Discussion Papers, Bank of Finland
No 19/2008:
Adverse selection and financing of innovation: is there a need for R&D subsidies?
Tuomas Takalo ()
and Tanja Tanayama ()
Abstract: We study the interaction between private and public
funding of innovative projects in the presence of adverse-selection based
financing constraints. Government programmes allocating direct subsidies
are based on ex-ante screening of the subsidy applications. This selection
scheme may yield valuable information to market-based financiers. We find
that under certain conditions, public R&D subsidies can reduce the
financing constraints of technology-based entrepreneurial firms. Firstly,
the subsidy itself reduces the capital costs related to innovation projects
by reducing the amount of market-based capital required. Secondly, the
observation that an entrepreneur has received a subsidy for an innovation
project provides an informative signal to market-based financiers. We also
find that public screening works more efficiently if it is accompanied by
subsidy allocation.
Keywords: adverse selection; innovation finance; financial constraints; R&D subsidies; certification; (follow links to similar papers)
JEL-Codes: D82; G28; H20; O30; O38; (follow links to similar papers)
41 pages, September 9, 2008
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- This paper is published as:
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Takalo, Tuomas and Tanja Tanayama, (2010), 'Adverse selection and financing of innovation: is there a need for R&D subsidies?', Journal of Technology Transfer, Vol. 35, February, No. 1, pages 16-41
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