Advanced Search
MyIDEAS: Login to save this paper or follow this series

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

Contents:

Author Info

  • Takalo, Tuomas

    ()
    (Bank of Finland Research)

  • Tanayama, Tanja

    ()
    (Helsinki Center of Economic Research (HECER))

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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0819netti.pdf
Download Restriction: no

Bibliographic Info

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

as in new window
Length: 41 pages
Date of creation: 09 Sep 2008
Date of revision:
Publication status: Published as Takalo, Tuomas and Tanja Tanayama, 'Adverse selection and financing of innovation: is there a need for R&D subsidies?' in Journal of Technology Transfer , 2010, pages 16-41.
Handle: RePEc:hhs:bofrdp:2008_019

Contact details of provider:
Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
More information through EDIRC

Related research

Keywords: adverse selection; innovation finance; financial constraints; R&D subsidies; certification;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, American Economic Association, vol. 80(5), pages 1183-1200, December.
  2. Asher Blass & Oved Yosha, 2003. "Financing R&D in mature companies: An empirical analysis," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 12(5), pages 425-447.
  3. Hall, Bronwyn, 2002. "The Financing of Research and Development," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt5rf0x9gz, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  4. Holmstrom, Bengt & Tirole, Jean, 1997. "Financial Intermediation, Loanable Funds, and the Real Sector," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(3), pages 663-91, August.
  5. Spiros Bougheas & Holger Görg & Eric Strobl, 2003. "Is R & D Financially Constrained? Theory and Evidence from Irish Manufacturing," Review of Industrial Organization, Springer, Springer, vol. 22(2), pages 159-174, March.
  6. Bronwyn H. Hall., 1992. "Investment and Research and Development at the Firm Level: Does the Source of Financing Matter?," Economics Working Papers, University of California at Berkeley 92-194, University of California at Berkeley.
  7. Bhattacharya, Sudipto & Ritter, Jay R, 1983. "Innovation and Communication: Signalling with Partial Disclosure," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 50(2), pages 331-46, April.
  8. Stephen BOND & Dietmar HARHOFF & John VAN REENEN, 2005. "Investment, R&D and Financial Constraints in Britain and Germany," Annales d'Economie et de Statistique, ENSAE, issue 79-80, pages 433-460.
  9. de Meza, David & Webb, David, 2000. "Does credit rationing imply insufficient lending?," Journal of Public Economics, Elsevier, Elsevier, vol. 78(3), pages 215-234, November.
  10. Rafael Repullo & Javier Suarez, 1999. "Entrepreneurial moral hazard and bank monitoring: a model of the credit channel," Discussion Paper / Institute for Empirical Macroeconomics 129, Federal Reserve Bank of Minneapolis.
  11. Alam, Pervaiz & Walton, Karen Schuele, 1995. "Information Asymmetry and Valuation Effects of Debt Financing," The Financial Review, Eastern Finance Association, Eastern Finance Association, vol. 30(2), pages 289-311, May.
  12. Chan, Yuk-Shee & Greenbaum, Stuart I. & Thakor, Anjan V., 1986. "Information reusability, competition and bank asset quality," Journal of Banking & Finance, Elsevier, Elsevier, vol. 10(2), pages 243-253, June.
  13. Diamond, Douglas W, 1989. "Reputation Acquisition in Debt Markets," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(4), pages 828-62, August.
  14. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, American Finance Association, vol. 32(2), pages 371-87, May.
  15. Marco Da Rin & Giovanna Nicodano & Alessandro Sembenelli, 2004. "Public Policy and the Creation of Active Venture Capital Markets," Working Papers 270, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  16. Amit, Raphael & Brander, James & Zott, Christoph, 1998. "Why do venture capital firms exist? theory and canadian evidence," Journal of Business Venturing, Elsevier, vol. 13(6), pages 441-466, November.
  17. Hyytinen, Ari & Pajarinen, Mika, 2002. "Small Business Finance in Finland. A Descriptive Study," Discussion Papers, The Research Institute of the Finnish Economy 812, The Research Institute of the Finnish Economy.
  18. Josh Lerner, 2002. "When Bureaucrats Meet Entrepreneurs: The Design of Effective "Public Venture Capital" Programmes," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 112(477), pages F73-F84, February.
  19. Masako Ueda, 2004. "Banks versus Venture Capital: Project Evaluation, Screening, and Expropriation," Journal of Finance, American Finance Association, American Finance Association, vol. 59(2), pages 601-621, 04.
  20. Robert Hauswald & Robert Marquez, 2006. "Competition and Strategic Information Acquisition in Credit Markets," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 19(3), pages 967-1000.
  21. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  22. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  23. Lerner, Joshua, 1998. ""Angel" financing and public policy: An overview," Journal of Banking & Finance, Elsevier, Elsevier, vol. 22(6-8), pages 773-783, August.
  24. Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, American Economic Association, vol. 75(4), pages 850-55, September.
  25. Albano, Gian Luigi & Lizzeri, Alessandro, 2001. "Strategic Certification and Provision of Quality," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(1), pages 267-83, February.
  26. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
  27. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, American Economic Association, vol. 80(1), pages 93-106, March.
  28. de Meza, David & Webb, David C, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 102(2), pages 281-92, May.
  29. Fuest, Clemens & Tillessen, Philipp, 2005. "Why do governments use closed ended subsidies to support entrepreneurial investment?," Economics Letters, Elsevier, Elsevier, vol. 89(1), pages 24-30, October.
  30. Robin Boadway & Michael Keen, 2006. "Financing and Taxing New Firms under Asymmetric Information," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, Mohr Siebeck, Tübingen, vol. 62(4), pages 471-502, December.
  31. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, Elsevier, vol. 13(2), pages 187-221, June.
  32. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, American Economic Association, vol. 71(3), pages 393-410, June.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Busom, Isabel & Corchuelo, Beatriz & Martinez Ros, Ester, 2012. "Tax incentives or subsidies for R&D?," MERIT Working Papers 056, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  2. Tuomas Takalo, 2012. "Rationales and Instruments for Public Innovation Policies," Journal of Reviews on Global Economics, Lifescience Global, vol. 1, pages 157-167.
  3. Ensthaler, Ludwig & Giebe, Thomas, 2010. "A dynamic auction for multi-object procurement under a hard budget constraint," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 310, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  4. Bertoni, Fabio & Tykvová, Tereza, 2012. "Which form of venture capital is most supportive of innovation?," ZEW Discussion Papers 12-018, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  5. Bernd Ebersberger, 2011. "Public funding for innovation and the exit of firms," Journal of Evolutionary Economics, Springer, Springer, vol. 21(3), pages 519-543, August.
  6. Hasan Bakhshi & John Edwards & Stephen Roper & Judy Scully & Duncan Shaw & Lorraine Morley & Nicola Rathbone, 2013. "An Experimental Approach to Industrial Policy Evaluation: The case of Creative Credits," Research Papers, University of Warwick, Warwick Business School, Enterprise Research Centre 0004, University of Warwick, Warwick Business School, Enterprise Research Centre.
  7. José Ángel Zúñiga-Vicente & César Alonso-Borrego & Francisco J. Forcadell & José I. Galán, 2014. "Assessing The Effect Of Public Subsidies On Firm R&D Investment: A Survey," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 28(1), pages 36-67, 02.
  8. Licht, Georg & Pfirrmann, Oliver & Strohmeyer, Robert & Heinrich, Stephan & Tonoyan, Vartuhi & Eckert, Thomas & Woywode, Michael & Crass, Dirk & Sellenthin, Mark O., 2012. "Ex-post-Evaluierung der Fördermaßnahmen BioChance und BioChancePlus im Rahmen der Systemevaluierung "KMU-innovativ": Begleit- und Wirkungsforschung zur Hightech-Strategie," ZEW Dokumentationen 12-05, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  9. Isabel Busom & Beatriz Corchuelo & Ester Martínez-Ros, 2011. "Tax incentives and direct support for R&D : what do firms use and why?," Business Economics Working Papers id-11-03, Universidad Carlos III, Instituto sobre Desarrollo Empresarial "Carmen Vidal Ballester".
  10. Meuleman, Miguel & De Maeseneire, Wouter, 2012. "Do R&D subsidies affect SMEs’ access to external financing?," Research Policy, Elsevier, Elsevier, vol. 41(3), pages 580-591.
  11. Toivanen, Otto, 2009. "Innovation Policy, Entrepreneurship, and Development: A Finnish View," MERIT Working Papers 050, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  12. Massimo Colombo & Philippe Mustar & Mike Wright, 2010. "Dynamics of Science-based entrepreneurship," The Journal of Technology Transfer, Springer, Springer, vol. 35(1), pages 1-15, February.
  13. Richard Gretz & Jannett Highfill & Robert Scott, 2012. "R&D subsidy games: a cost sharing approach vs. reward for performance," The Journal of Technology Transfer, Springer, Springer, vol. 37(4), pages 385-403, August.
  14. Uwe Cantner & Sarah Kösters, 2009. "Picking the Winner? - Empirical Evidence on the Targeting of R&D Subsidies to Start-ups," Jena Economic Research Papers 2009-093, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:hhs:bofrdp:2008_019. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Minna Nyman).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.