Discussion Paper Details

Please find the details for DP12199 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Government Financing of R&D: A Mechanism Design Approach

Author(s): Saul Lach, Zvika Neeman and Mark Schankerman

Publication Date: August 2017

Keyword(s): additionality, entrepreneurship, government finance, Innovation, mechanism design, R&D and start-ups

Programme Area(s): Industrial Organization

Abstract: We study how to design an optimal government loan program for risky R&D projects with positive externalities. With adverse selection, the optimal government contract involves a high interest rate but nearly zero co-financing by the entrepreneur. This contrasts sharply with observed loan schemes. With adverse selection and moral hazard (two effort levels), the optimal policy consists of a menu of at most two contracts, one with high interest and zero self-financing, and a second with a lower interest plus co-financing. Calibrated simulations assess welfare gains from the optimal policy, observed loan programs, and a direct subsidy to the private venture capital market. The gains vary with the size of the externalities, cost of public funds, and effectiveness of the private VC industry.

For full details and related downloads, please visit:

Bibliographic Reference

Lach, S, Neeman, Z and Schankerman, M. 2017. 'Government Financing of R&D: A Mechanism Design Approach'. London, Centre for Economic Policy Research.