Adverse selection and financing of innovation : is there a need for R&D subsidies?

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Title: Adverse selection and financing of innovation : is there a need for R&D subsidies?
Author: Takalo, Tuomas ; Tanayama, Tanja
Organization: Suomen Pankki
Series: Bank of Finland Research Discussion Papers
Series number: 19/2008
Year of publication: 2008
Publication date: 1.7.2008
Published in: Published in Journal of Technology Transfer, Volume 35, Number 1, February 2010: 16-41
Pages: 39 s.
Keywords: valtiontuki; tukipalkkiot; R&D; innovaatiot; informaatio; rahoitus; yritykset; adverse selection
JEL: D82; G28; H20; O30; O38
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. Keywords: adverse selection, innovation finance, financial constraints, R&D subsidies, certification JEL classification numbers: D82, G28, H20, O30, O38
Note: Ilmestynyt myös THE JOURNAL OF TECHNOLOGY TRANSFER 35 ; 1 ; 2010.

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