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

  • Takalo, Tuomas

    ()

    (Bank of Finland Research)

  • Tanayama, Tanja

    ()

    (Helsinki Center of Economic Research (HECER))

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.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0819netti.pdf
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Paper provided by Bank of Finland in its series Research Discussion Papers with number 19/2008.

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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/

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