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Sunk costs, extensive R&D subsidies and permanent inducement effects

  • Pere Arqué-Castells


    (Universitat Autònoma de Barcelona & IEB)

  • Pierre Mohnen


    (University of Maastricht)

We study whether there is scope for using subsidies to smooth out barriers to R&D performance and expand the share of R&D firms in Spain. We consider a dynamic model with sunk entry costs in which firms’ optimal participation strategy is defined in terms of two subsidy thresholds that characterise entry and continuation. We compute the subsidy thresholds from the estimates of a dynamic panel data type-2 tobit model for an unbalanced panel of about 2,000 Spanish manufacturing firms. The results suggest that “extensive” subsidies are a feasible and efficient tool for expanding the share of R&D firms.

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Paper provided by Institut d'Economia de Barcelona (IEB) in its series Working Papers with number 2012/13.

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Length: 62 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:ieb:wpaper:2012/5/doc2012-13
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  1. Richard Baldwin, 1989. "Sunk-Cost Hysteresis," NBER Working Papers 2911, National Bureau of Economic Research, Inc.
  2. Sofronis Clerides & Saul Lach & James Tybout, 1996. "Is "Learning-by-Exporting" Important? Micro-Dynamic Evidence from Colombia, Mexico and Morocco," NBER Working Papers 5715, National Bureau of Economic Research, Inc.
  3. Klette, Tor Jakob & Moen, Jarle & Griliches, Zvi, 2000. "Do subsidies to commercial R&D reduce market failures? Microeconometric evaluation studies1," Research Policy, Elsevier, vol. 29(4-5), pages 471-495, April.
  4. Jeffrey M Wooldridge, 2002. "Simple solutions to the initial conditions problem in dynamic, nonlinear panel data models with unobserved heterogeneity," CeMMAP working papers CWP18/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  5. Birgit Aschhoff, 2010. "Who Gets the Money? The Dynamics of R&D Project Subsidies in Germany," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 230(5), pages 522-546, October.
  6. Malerba, Franco & Orsenigo, Luigi, 1999. "Technological entry, exit and survival: an empirical analysis of patent data," Research Policy, Elsevier, vol. 28(6), pages 643-660, August.
  7. Paul A. David & Bronwyn H. Hall & Andrew A. Toole, 2005. "Is Public R&D a Complement or Substitute for Private R&D? A Review of the Econometric Evidence," Development and Comp Systems 0502011, EconWPA.
  8. Klette, T.J. & Moen, J. & Griliches, Z., 1999. "Do Subsidies to Commercial R&D Reduce Market Failures? Microeconometric Evaluation Studies," Papers 16/99, Norwegian School of Economics and Business Administration-.
  9. Xulia Gonz�lez & Jordi Jaumandreu & Consuelo Pazo, 2005. "Barriers to Innovation and Subsidy Effectiveness," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 930-949, Winter.
  10. Wladimir Raymond & Pierre Mohnen & Franz Palm & Sybrand Schim van der Loeff, 2010. "Persistence of Innovation in Dutch Manufacturing: Is It Spurious?," The Review of Economics and Statistics, MIT Press, vol. 92(3), pages 495-504, August.
  11. Peters, Bettina, 2005. "Persistence of Innovation: Stylised Facts and Panel Data Evidence," ZEW Discussion Papers 05-81, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  12. Blanes, J. Vicente & Busom, Isabel, 2004. "Who participates in R&D subsidy programs?: The case of Spanish manufacturing firms," Research Policy, Elsevier, vol. 33(10), pages 1459-1476, December.
  13. Nelson, Forrest D., 1977. "Censored regression models with unobserved, stochastic censoring thresholds," Journal of Econometrics, Elsevier, vol. 6(3), pages 309-327, November.
  14. Juan A. M��Ez & Mar�A E. Rochina-Barrachina & Amparo Sanchis & Juan A. Sanchis, 2009. "THE ROLE OF SUNK COSTS IN THE DECISION TO INVEST IN R&D -super-* ," Journal of Industrial Economics, Wiley Blackwell, vol. 57(4), pages 712-735, December.
  15. Richard C. Levin & Peter C. Reiss, 1988. "Cost-Reducing and Demand-Creating R&D with Spillovers," RAND Journal of Economics, The RAND Corporation, vol. 19(4), pages 538-556, Winter.
  16. Mark B. Stewart, 2007. "The interrelated dynamics of unemployment and low-wage employment," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(3), pages 511-531.
  17. Mundlak, Yair, 1978. "On the Pooling of Time Series and Cross Section Data," Econometrica, Econometric Society, vol. 46(1), pages 69-85, January.
  18. Elena Huergo & Mayte Trenado, 2010. "The Application for and the Awarding of Low-Interest Credits to Finance R&D Projects," Review of Industrial Organization, Springer, vol. 37(3), pages 237-259, November.
  19. Xulia González & Jordi Jaumandreu, . "Threshold effects in product R&D decisions: theoretical framework and empirical analysis," Studies on the Spanish Economy 78, FEDEA.
  20. Tuomas Takalo & Tanja Tanayama & Otto Toivanen, 2013. "Estimating the Benefits of Targeted R&D Subsidies," The Review of Economics and Statistics, MIT Press, vol. 95(1), pages 255-272, March.
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