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

  • Tuomas Takalo

    ()

  • Tanja Tanayama

    ()

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. Keywords: adverse selection, innovation finance, financial constraints, R&D subsidies, certification JEL classification numbers: D82, G28, H20, O30, O38

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File URL: http://hdl.handle.net/10.1007/s10961-009-9112-8
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Article provided by Springer in its journal The Journal of Technology Transfer.

Volume (Year): 35 (2010)
Issue (Month): 1 (February)
Pages: 16-41

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Handle: RePEc:kap:jtecht:v:35:y:2010:i:1:p:16-41
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