Discussion paper

DP17717 R&D and Subsidy Policy with Imperfect Project Classification

We characterize optimal subsidies for firms facing limitations in their ability to correctly classify risky R&D projects. We demonstrate that the optimal subsidy is an increasing function of firms' ability to reduce type-I errors in accepting projects with a success potential, and a decreasing function in their type-II error of adopting projects with no success potential. Moreover, the optimal subsidy is decreasing in the informational advantage regarding the assessment of project viability of private firms relative to the government.


Gehrig, T and R Stenbacka (2022), ‘DP17717 R&D and Subsidy Policy with Imperfect Project Classification‘, CEPR Discussion Paper No. 17717. CEPR Press, Paris & London. https://cepr.org/publications/dp17717