Scandinavian Working Papers in Economics
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Bank of Finland Research Discussion Papers, Bank of Finland

No 2/2013:
Market failures and the additionality effects of public support to private R&D: Theory and empirical implications

Tuomas Takalo (), Tanja Tanayama () and Otto Toivanen ()

Abstract: We extend the theoretical basis of the empirical literature on the effects of R&D subsidies by providing an estimable model of strategic interaction among subsidy applicants, and public and private sector R&D financiers. Our model incorporates fixed R&D costs and a cost of external finance. We derive the optimal support rule. At the intensive (extensive) margin the costs of external funding reduce (increase) the optimal subsidy rate. We also establish necessary and sufficient conditions for the existence of additionality. It turns out that additionality at the intensive margin is less likely with large spillovers. Our results suggest that the relationship between additionality and welfare may not be straightforward.

Keywords: R&D; entrepreneurial finance; R&D subsidies; innovation policy; (follow links to similar papers)

JEL-Codes: G28; H25; L32; O38; (follow links to similar papers)

40 pages, February 13, 2013

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This paper is published as:
Takalo, Tuomas, Tanja Tanayama and Otto Toivanen, (2013), 'Market failures and the additionality effects of public support to private R&D: Theory and empirical implications', International Journal of Industrial Organization, Vol. 31, September, pages 634-642

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