Working Paper: CEPR ID: DP17717
Authors: Thomas Gehrig; Rune Stenbacka
Abstract: We characterize optimal subsidies for firms facing limitations in their ability to correctly classify risky R&D projects. We demonstrate that the optimal subsidy is an increasing function of firms' ability to reduce type-I errors in accepting projects with a success potential, and a decreasing function in their type-II error of adopting projects with no success potential. Moreover, the optimal subsidy is decreasing in the informational advantage regarding the assessment of project viability of private firms relative to the government.
Keywords: Imperfect Screening; Subsidy Policies
JEL Codes: D83; H25; H83; L52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Firms' ability to reduce type I errors (D22) | Optimal subsidy (H21) |
| Firms' ability to increase type II errors (D21) | Optimal subsidy (H21) |
| Informational advantage of firms over government (D82) | Optimal subsidy (H21) |