Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212110 
Year of Publication: 
2008
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 19/2008
Publisher: 
Bank of Finland, Helsinki
Abstract: 
We study the interaction between private and public funding of innovative projects in the presence of adverse-selection based financing constraints. Government programmes allocating direct subsidies are based on ex-ante screening of the subsidy applications. This selection scheme may yield valuable information to market-based financiers. We find that under certain conditions, public R&D subsidies can reduce the financing constraints of technology-based entrepreneurial firms. Firstly, the subsidy itself reduces the capital costs related to innovation projects by reducing the amount of market-based capital required. Secondly, the observation that an entrepreneur has received a subsidy for an innovation project provides an informative signal to market-based financiers. We also find that public screening works more efficiently if it is accompanied by subsidy allocation.
Subjects: 
adverse selection
innovation finance
financial constraints
R&D subsidies
certification
JEL: 
D82
G28
H20
O30
O38
Persistent Identifier of the first edition: 
ISBN: 
978-952-462-455-8
Document Type: 
Working Paper

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