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Government financing of R&D: a mechanism design approach

Lach, Saul, Neeman, Zvika and Schankerman, Mark (2020) Government financing of R&D: a mechanism design approach. American Economic Journal: Microeconomics. ISSN 1945-7669 (In Press)

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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, 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 co-financing. 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, cost of public funds, and effectiveness of the private VC industry.

Item Type: Article
Official URL: https://www.aeaweb.org/journals/mic
Divisions: Economics
Date Deposited: 05 Aug 2020 12:33
Last Modified: 28 Aug 2020 23:27
URI: http://eprints.lse.ac.uk/id/eprint/105873

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