Sunk costs, extensive R&D subsidies and permanent inducement effects

P. Arqué-Castells, P. Mohnen

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

Using firm-level data on Spanish manufacturing firms we estimate a model of the firm's optimal R&D decisions (whether to perform R&D and how much to invest). We quantify the fixed (proper fixed costs plus firms' outside option) and sunk costs of R&D and find the former to be substantially higher than the latter. While sunk costs act as a barrier to entry into R&D for some firms, fixed costs are the binding obstacle for many more firms. Simulation based on the estimated model reveals that one-shot trigger subsidies cause a substantial increase in both the share of R&D firms and average R&D expenditures. This effect shows persistence over time, but totally fades away after seven years as firms are gradually hit by negative R&D profitability shocks.
Original languageEnglish
Pages (from-to)458-494
Number of pages37
JournalJournal of Industrial Economics
Volume63
Issue number3
DOIs
Publication statusPublished - Sep 2015

Keywords

  • ECONOMETRIC EVIDENCE
  • MARKET FAILURES
  • INNOVATION
  • PERSISTENCE
  • COMPLEMENT
  • DYNAMICS

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