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Government financing of R&D: a mechanism design approach

Lach, Saul, Neeman, Zvika and Schankerman, Mark (2021) Government financing of R&D: a mechanism design approach. American Economic Journal: Microeconomics, 13 (3). 238 - 272. ISSN 1945-7669

[img] Text (Government financing of R&D) - Accepted Version
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Identification Number: 10.1257/mic.20190053


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 cofinancing by the entrepreneur. This contrasts sharply with observed loan schemes. With adverse selection and moral hazard, allowing for two levels of effort by the entrepreneur, 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 cofinancing. Calibrated simulations assess welfare gains from the optimal policy, observed loan programs, and a direct subsidy to private venture capital firms. The gains vary with the size of the externalities, the cost of public funds, and the effectiveness of the private venture capital industry.

Item Type: Article
Official URL:
Additional Information: © 2021 American Economic Association
Divisions: Economics
Subjects: H Social Sciences > HJ Public Finance
H Social Sciences > HG Finance
JEL classification: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D86 - Economics of Contract: Theory
G - Financial Economics > G2 - Financial Institutions and Services > G24 - Investment Banking; Venture Capital; Brokerage; Rating Agencies
G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
H - Public Economics > H8 - Miscellaneous Issues > H81 - Governmental Loans, Loan Guarantees, and Credits
O - Economic Development, Technological Change, and Growth > O3 - Technological Change; Research and Development > O31 - Innovation and Invention: Processes and Incentives
Date Deposited: 05 Aug 2020 12:33
Last Modified: 27 May 2022 18:03

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