Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/122313
Authors: 
Brüggemann, Julia
Year of Publication: 
2015
Series/Report no.: 
Discussion Papers, Center for European Governance and Economic Development Research 266
Abstract: 
The effects of public subsidies in supporting private innovative activity is subject to longstanding political and scientific debates. Since the empirical findings remain largely inconclusive, this study adds to this debate with counterfactual evidence from a laboratory experiment. In a creative real effort task simulating the innovation process, two distinct means of allocating subsidies are compared to a benchmark treatment without subsidies to identify their effects in fostering innovativeness. Furthermore, subjects' cooperative behavior in relation to subsidies is investigated. Overall, subsidies lead to a substantial crowding-out of private investment. While the individual revenues increase due to the subsidy, the innovative activity fails to increase and less sophisticated innovations are realized. Consequently, subsidies have no positive and even negative effects on overall welfare, depending on the subsidy specifics. However, subsidies do not influence cooperative behavior. These findings imply that the additional costs of subsidies for innovations might not be warranted by gains from additional innovations and increased welfare.
Subjects: 
creativity
innovation policy
laboratory experiment
real effort task
subsidies
JEL: 
C91
H25
O31
Document Type: 
Working Paper

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