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Government R&D Subsidies as a Signal for Private Investors

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  • Robin Kleer
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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. In a setup where the subsidy can only be used to distinguish between high and low risk 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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    File URL: http://www.bgpe.de/texte/DP/066_kleer.pdf
    File Function: First version, 2008
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    Bibliographic Info

    Paper provided by Bavarian Graduate Program in Economics (BGPE) in its series Working Papers with number 066.

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    Length: 21 pages
    Date of creation: Nov 2008
    Date of revision:
    Handle: RePEc:bav:wpaper:066_kleer

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    Related research

    Keywords: Subsidies; Innovation; Asymmetric Information; Signaling;

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