Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/267462 
Year of Publication: 
2022
Series/Report no.: 
IZA Discussion Papers No. 15725
Publisher: 
Institute of Labor Economics (IZA), Bonn
Abstract: 
Current literature on the impact assessment of government innovation subsidies is mainly empirical driven and lacks an overarching theoretical model to explain the conditions under which government subsidies create positive additionalities on private R&D investment. In this paper, we present a theoretical model that treats government subsidies as a risk-sharing vehicle for private R&D activities. More importantly, we argue that positive additionalities will be more likely to occur when the subsidies are allocated based on the risk-reward condition of the project. In addition, we show that the risk-sharing effect of government subsidies is influenced by a firm's absorptive capacity and the asset specificity of the project. By showing the conditions under which subsidies create positive additionality, we provide guidance to policymakers on how to improve the effectiveness of government support for innovation.
Subjects: 
government subsidy
additionality
R&D and innovation
the risk-sharing model
absorptive capacity
asset specificity
JEL: 
D50
H81
O31
O38
Document Type: 
Working Paper

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