Sunk costs, extensive R&D subsidies and permanent inducement effects
Pere Arqué-Castells & Pierre Mohnen
We study whether there is scope for using subsidies to smooth out
barriers to R&D performance and expand the share of R&D firms in Spain.
We consider a dynamic model with sunk entry costs in which firms'
optimal participation strategy is defined in terms of two subsidy
thresholds that characterize entry and continuation. We compute the
subsidy thresholds from the estimates of a dynamic panel data type-2
tobit model for an unbalanced panel of about 2,000 Spanish manufacturing
firms. The results suggest that "extensive" subsidies are a feasible and
efficient tool for expanding the share of R&D firms.
Keywords: R&D, Persistence, Subsidies, Dynamic models
JEL Codes: H2, O2, C1, D2