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Author(s)

David Besanko

Jian Tong

Jianjun Wu

We study subsidy policies for research programs when firms have private information about the likelihood of project viability but the government cannot form a unique prior about this likelihood. When the shadow cost of public funds is zero, first-best welfare can be attained as a (belief-free) ex post equilibrium under both monopoly and competition, but it cannot be attained when the shadow cost is positive. However, max-min subsidy policies exist under monopoly and competition and consist of pure matching subsidies. Under an R&D consortium, the highest max-min matching rate is lower than under competition, and R&D investment intensity is higher.
Date Published: 2018
Citations: Besanko, David, Jian Tong, Jianjun Wu. 2018. Subsidizing research programs with “if” and “when” uncertainty in the face of severe informational constraints. RAND Journal of Economics. (2)285-310.