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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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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.
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
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
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.”
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)
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
the model continuum of research institutions. cost of converting funding into results.
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
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
payoff functions institutions government satisfying: for every
preliminaries individually efficient applied research lower
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
perfect information overall budget £
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
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
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
asymmetric information II Prop: A policy is incentive compatible if: (i) (ii) (iii) (iv) must be decreasing 19
asymmetric information II: the government’s problem subject to:
asymmetric information II: the government’s problem subject to:
solution define two functions: by: by: 22
solution 23
solution 24
solution is large Prop:
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
implementation: High social value of applied research. very high cost institution. -type institution £ B a
implementation: High social value of applied research. middle cost institution. -type institution £ B A a
implementation: High social value of applied research. low cost institution. -type institution £ A C a
implementation: High social value of applied research. very high cost institution. -type institution £ B a
implementation: High social value of applied research. middle cost institution. £ B A a
implementation: High social value of applied research. low cost institution. B £ C A a
marginal cost of applied research The end. 1. full economic costing? £ marginal funding for applied research a
2. implementation: Low social value of applied research. is (well) below 1
2. implementation: Low social value of applied research. is (well) below 1 £ a
solution 42
