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Adverse selection and financing of innovation: is there a need for R&D subsidies?

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Author Info
Takalo , Tuomas () (Bank of Finland Research)
Tanayama , Tanja () (Helsinki Center of Economic Research (HECER))

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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.

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Publisher Info
Paper provided by Bank of Finland in its series Research Discussion Papers with number 19/2008.

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Length: 41 pages
Date of creation: 09 Sep 2008
Date of revision:
Handle: RePEc:hhs:bofrdp:2008_019

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
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Related research
Keywords: adverse selection; innovation finance; financial constraints; R&D subsidies; certification;

Other versions of this item:

Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
O30 - Economic Development, Technological Change, and Growth - - Technological Change - - - General
O38 - Economic Development, Technological Change, and Growth - - Technological Change - - - Government Policy

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References listed on IDEAS
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  1. Kinnunen, Helvi, 2008. "Government funds and demographic transition – alleviating ageing costs in a small open economy," Research Discussion Papers 21/2008, Bank of Finland. [Downloadable!]
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