R&D, Risk, and the Role of Targeted Government R&D Programs

Abstract

This paper clarifies the role of passive incentives and targeted governmentR&D support programs in R&D policy. Using a principal-agent framework, a theoreticalmodel of firm R&D behavior is developed, and suggests that without targeted R&Dsupport programs many R&D projects with the greatest spillover potential would neverbe undertaken. Passive incentives encourage the firm to conduct a greater amount ofR&D, while targeted support encourages the firm to pursue R&D projects it would notnormally undertake. These results are independent of the effect of government R&Ddollars on private R&D dollars. We incorporate risk into the model to examine programswhere targeted funding is reserved for high risk projects. Our theoretical results supportcurrent practice of these programs: high risk, high reward R&D projects that would notnormally be undertaken by private firms are supported. However, constraining theseprograms to focus only on high risk projects may cause low risk projects with greaterexpected benefits to be ignored (O32, D81, H25).