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Government Financing of R&D: A Mechanism Design Approach

Listed author(s):
  • Lach, Saul
  • Neeman, Zvika
  • Schankerman, Mark
Registered author(s):

    We study the design of a government loan program for risky R&D projects that generate positive externalities, undertaken by entrepreneurs in a competitive capital market environment. With adverse selection, the optimal contract requires a high interest rate but nearly zero co-financing by the entrepreneur. This contrasts sharply with observed policies, typified by a low interest rate and high co-finanacing requirement. When we add moral hazard (endogenous success), the optimal policy consists of a menu of at most two contracts, one with high interest/zero self-finanacing and a second with a lower interest but also a co-finanacing requirement. Calibrated simulations compare the optimal policy and observed program designs in terms of innovation and welfare.

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    File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12199
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    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 12199.

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    Date of creation: Aug 2017
    Handle: RePEc:cpr:ceprdp:12199
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