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Sunk Costs, Extensive R&D Subsidies and Permanent Inducement Effects

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  • Pere Arqué-Castells
  • Pierre Mohnen

Abstract

type="main"> Using firm-level data on Spanish manufacturing firms we estimate a model of the firm's optimal R&D decisions (whether to perform R&D and how much to invest). We quantify the fixed (proper fixed costs plus firms' outside option) and sunk costs of R&D and find the former to be substantially higher than the latter. While sunk costs act as a barrier to entry into R&D for some firms, fixed costs are the binding obstacle for many more firms. Simulation based on the estimated model reveals that one-shot trigger subsidies cause a substantial increase in both the share of R&D firms and average R&D expenditures. This effect shows persistence over time, but totally fades away after seven years as firms are gradually hit by negative R&D profitability shocks.

Suggested Citation

  • Pere Arqué-Castells & Pierre Mohnen, 2015. "Sunk Costs, Extensive R&D Subsidies and Permanent Inducement Effects," Journal of Industrial Economics, Wiley Blackwell, vol. 63(3), pages 458-494, September.
    • Handle: RePEc:bla:jindec:v:63:y:2015:i:3:p:458-494
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    More about this item

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis

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