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A Theoretical Analysis of Public Funding for Research. Gianni De Fraja University of Leicester, Università di Roma ‘Tor Vergata’ and CEPR. Higher School of Economics – Moscow 29 march 2012.

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slide1

A Theoretical Analysis of Public Funding for Research

Gianni De Fraja

University of Leicester, Università di Roma ‘Tor Vergata’ and CEPR

Higher School of Economics – Moscow

29 march 2012

This paper studies government funding for scientific research. Funds must be distributed among different research institutions and allocated between basic and applied research. Informational constraints prevent less productive institutions to be given any government funding. In order to internalise the beneficial effects of research, the government requires the most productive institutions to carry out more applied research than they would like. Funding for basic research is used by the government to this end.

slide2

macro

lots of government money spent on R&D

0.8% in OECD

0.2% in Mexico, 1.1% in Spain

micro

way to pay for R&D

who to pay for R&D

what type of R&D

slide3

way to pay for R&D

who to pay for R&D

what type of R&D

one third

some funding linked to specific projects (research grant)

some funding given to institutions (block grant)

some funding as a reward for past success.

}

two thirds

many different institutions

research grants: the top 25 universities received 85%

quality related funding: the top 25 universities received 75%

basic vs applied research

one fifth is basic research

slide4

basic and applied research

driven by scientists’ curiosity, its aim to acquire knowledge for knowledge’s sake

NSF: “basic research is defined as systematic study directed toward fuller knowledge or understanding of the fundamental aspects of phenomena and of observable facts without specific applications towards processes or products in mind.”

designed to solve practical problems

  • Moody (1995) on the CD
  • Haustein (2009) on the sat-nav
  • Edelson (1992) on tiling and superconductors
  • du Satoy (2003) on Riemann hypothesis and credit card security

NSF: “applied research is defined as systematic study to gain knowledge or understanding necessary to determine the means by which a recognized and specific need may be met.”

slide5

model

link between basic and applied research

hierarchical

more diffuse uncertainty

for an applied research project, the benefits can be ex-ante described, and ex-post measured

government has information disadvantage

government finances institutions

no difference between private and public institutions

(Aghion et al. 2008)

government internalises externality

no individual externality (as in R&D done by firms)

(Stephan 1996)

slide6

results

inefficiency determined by information disadvantage

basic research used as a reward for doing applied research

research is inefficiently concentrated

funding: better institutions receive more grants, and less block funding

funding: full economic costing a bad idea; cost sharing (co-funding) is preferable

slide7

the model

continuum of research institutions.

cost of converting funding into results.

slide8

for a type institution, let

amount of applied research it does

amount of basic research it does

for society as a whole, let

total amount of applied research

total amount of basic research

slide9

effect of research

applied research increases GDP

basic research decreases cost of applied research

a given basic project has no effect on a given project (basic or applied). diffuse

=1

slide10

payoff functions

institutions

government

satisfying: for every

slide11

preliminaries

individually efficient applied research

lower

slide14

perfect information

the aggregate marginal cost of doing applied research is the same as the marginal benefit.

the marginal cost of doing applied research is the same in every institution.

efficient

better institutions do more applied research

it does not matter who does basic

slide15

perfect information

overall budget

£

slide16

asymmetric information I

the government cannot observe basic research

why?

the institution can “hide” it.

the government can only observe

- a minimum level of applied research

- total research expenditure

Cor: If the government can observe , then exactly the same as with perfect information

slide17

asymmetric information II

if the government cannot observe basic research & the government cannot observe

the above is not possible

each institution has a marginal cost of applied research higher than the marginal cost of basic research

17

slide18

asymmetric information II

use revelation principle

ask each institution to reveal its productivity

commit to a policy as a function of the report

it is not possible to increase payoff relative to the best policy which ensures truth-telling

18

slide19

asymmetric information II

Prop: A policy is incentive compatible if:

(i)

(ii)

(iii)

(iv)

must be

decreasing

19

slide22

solution

define two functions:

by:

by:

22

slide25

solution

is large

Prop:

slide29

implementation.

the only thing observed is the amount of applied research

a link between a target amount of applied research carried out and the total amount of funding an institution receives

slide31

implementation: High social value of applied research.

very high cost institution.

-type

institution

£

B

a

slide32

implementation: High social value of applied research.

middle cost institution.

-type

institution

£

B

A

a

slide33

implementation: High social value of applied research.

low cost institution.

-type

institution

£

A

C

a

slide35

implementation: High social value of applied research.

very high cost institution.

-type

institution

£

B

a

slide36

implementation: High social value of applied research.

middle cost institution.

£

B

A

a

slide37

implementation: High social value of applied research.

low cost institution.

B

£

C

A

a

slide38

marginal cost of applied research

The end. 1. full economic costing?

£

marginal funding for

applied research

a

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