Seminar 7 April 2014

Innovation Policy Reform

Abstract
Innovation policy is regarded important by both policy makers and academics. We analyze the effects of different government policies on R&D, firm profits, and welfare. We build a model where firms decide whether or not to apply for a subsidy; if they do, the government decides on the optimal subsidy level. The firms negotiate with private sector financiers who face a moral hazard problem. Finally, the firm decides whether or not to invest in R&D, and if, how much. We estimate the parameters of the model by taking the model to Finnish R&D project level data. We derive the optimal level of an R&D tax credit which according to our preliminary results is 43%. We find that optimal R&D tax credits and R&D subsidies generate higher R&D investments and spillovers than a laissez-faire regime without active innovation policies, with tax credits having the larger effect. In terms of overall welfare neither optimal R&D tax credits nor R&D subsidies improve the situation markedly over laissez-faire once the shadow cost of public funds is taken into account.

Contacts: Battista Severgnini and Cédric Schneider