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R&D and Subsidy Policy with Imperfect Project Classification

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  • Gehrig, Thomas
  • Stenbacka, Rune

Abstract

We characterize optimal subsidies for firms facing limitations in their ability to correctly classify risky R&D projects. We demonstrate that the optimal subsidy is an increasing function of firms' ability to reduce type-I errors in accepting projects with a success potential, and a decreasing function in their type-II error of adopting projects with no success potential. Moreover, the optimal subsidy is decreasing in the informational advantage regarding the assessment of project viability of private firms relative to the government.

Suggested Citation

  • Gehrig, Thomas & Stenbacka, Rune, 2022. "R&D and Subsidy Policy with Imperfect Project Classification," CEPR Discussion Papers 17717, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17717
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    Cited by:

    1. is not listed on IDEAS
    2. Yu, Hong & Zhang, Muyang & Zhu, Ruolu, 2025. "A reevaluation on the effectiveness of subsidies on firm's innovation: Evidence from newly categorized subsidy data," Technological Forecasting and Social Change, Elsevier, vol. 219(C).

    More about this item

    Keywords

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    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H83 - Public Economics - - Miscellaneous Issues - - - Public Administration
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods

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