The simulations show that neither (maximising) additionality nor (minimising) redundancy can be an appropriate criterion for evaluation of R&D support policies. Projects with less additionality or more redundancy may generate greater welfare. We also show that both full grants and interest-free loans – which are typical of observed policies – perform much worse that the perfect policy, unless the price of public funds is quite low, or the externality is quite large. Shifting from full grants to interest-free loans generate a considerable welfare gain, unless public funds have become cheap.
This research has two key policy implications for the look of R&D support policies. First, optimal policies should ‘target the middle’. Very low-risk projects will be funded by the marketplace, so government support is redundant, and incredibly high-risk projects, without supported by the private market, isn’t more likely to generate sufficient expected social payoff to justify support. This important message isn’t widely appreciated.
Also, as the optimal policy depends upon the expense of public funds and how big is the project externality, no design may very well be befitting all settings. Specifically, the optimal policy will probably differ across technology areas, and between industrialised and emerging economies. For instance, if emerging economies are characterised by more expensive of public funds (or lower externalities), the epsilon contract – which can be relatively better to implement – ought to be favoured.
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