Crowding-Out At The Top: The Heterogeneous Impact of R&D Subsidies on Firm Investment

This paper studies the impact of public R&D subsidies on investment decisions of recipient firms. I use quantile regression methods to characterize the effect of the subsidy at various points of firms’ R&D investment distribution. The identification strategy exploits a discontinuity in the probability of receiving the subsidy which results from program specific eligibility requirements. I find that the impact of public subsidies on firm investment varies significantly according to the amount of firm R&D investment. Subsidies to large R&D investors crowd-out their private R&D investment, whereas subsidies to small R&D investors add to their private investment. The magnitude of this crowding-out effect is both economically relevant and statistically significant. JEL classification: G32, H25, 031

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