Government Subsidies for Research Programs Facing "If" and "When" Uncertainty, RAND Journal of Economics
We study subsidy policies for research programs when firms have private information about the likelihood of project viability but the government cannot form a unique prior about this likelihood. When the shadow cost of public funds is zero, first-best welfare can be attained as a (belief-free) ex post equilibrium under both monopoly and competition, but it cannot be attained when the shadow cost is positive. However, max-min subsidy policies exist under monopoly and competition and consist of pure matching subsidies. Under an R&D consortium, the highest max-min matching rate is lower than under competition, and R&D investment intensity is higher.
David Besanko, Jian Tong, Jianjun Wu
Besanko, David, Jian Tong, and Jianjun Wu. 2018. Government Subsidies for Research Programs Facing "If" and "When" Uncertainty. RAND Journal of Economics.