Misappropriation of R&D Subsidies. Estimating Treatment Effects with One-sided Noncompliance
WIFO Research Seminar, Österreichisches Institut für Wirtschaftsforschung, Wien, 16.03.2022 12:30
Veranstalter: Österreichisches Institut für Wirtschaftsforschung
Online seit: 17.02.2022 0:00
In evaluating the effectiveness of R&D subsidies, the literature has focused on potential crowding out effects, while the
possibility of misappropriation of public funds that results from moral hazard behavior has been completely neglected. This
study develops a theoretical framework with which to identify misappropriation. Using Chinese firm-level data for the period
2001-2011, we show that misappropriation is a major threat. 42 percent of grantees misused R&D subsidies for non-research
purposes, accounting for 53 percent of the total amount of R&D subsidies. In a second step, we study the loss of effectiveness
of R&D subsidies in stimulating R&D expenditures that is due to misappropriation. We measure the loss in effectiveness by
estimating the causal effect of R&D subsidies in the presence of misappropriation using an intention-to-treat (ITT) estimator
and comparing it to the ideal situation (without misappropriation) using the complier average causal effect (CACE). We find
that China's R&D policy could have been more than twice as effective in boosting R&D without misappropriation. R&D expenditures
could have been stimulated beyond the subsidy amount (additionality), but noncompliant behavior has resulted in a moderately
strong partial crowding out effect. We find significant treatment heterogeneity by period, subsidy size, industry, and ownership.
Notably, the loss in effectiveness has diminished following a policy reform in 2006. Nevertheless, the misappropriation of
public funds considerably undermines the impact of R&D policies in China.