A Theoretical Analysis of Public Funding for Research

A Theoretical Analysis of Public Funding for Research

Gianni De FrajaUniversity of Leicester, Università di Roma ‘Tor Vergata’ and CEPR

Higher School of Economics – Moscow29 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.

0.8% in OECD

0.2% in Mexico, 1.1% in Spain

way to pay for R&D

who to pay for R&D

what type of R&D

lots of government money spent on R&D

macro

micro

many different institutions

some funding linked to specific projects (research grant)

some funding given to institutions (block grant)

some funding as a reward for past success.

way to pay for R&D

who to pay for R&D

what type of R&D

basic vs applied research

basic and applied research

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

designed to solve practical problems

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.”

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.”

• 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

link between basic and applied researchhierarchical more diffuse uncertainty

government has information disadvantage

government internalises externality no individual externality (as in R&D done by firms) (Stephan 1996)

government finances institutions no difference between private and public institutions (Aghion et al. 2008)

model

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

results

inefficiency determined by information disadvantage

basic research used as a reward for doing applied research

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

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

research is inefficiently concentrated

the modelthe model

continuum of research institutions.

Ff , 1F

0

1

d

d fF

cost of converting funding into results.

for a type institution, let

aamount of applied research it does

bamount of basic research it does

for society as a whole, let

total amount of applied research

total amount of basic research

dfaA

dfbB

effect of researcheffect of research

applied research increases GDP

0 AYAYbasic research decreases cost of applied research

Bbac ,,, 0

0

0

0

B

b

a

c

c

c

c

1,0,

0

0

0

0

ac

c

c

c

c

B

aB

BB

a

aa

0

0

bb

ab

c

c

BbcBacBbac b ,,,,,, =1 bBacBbac ,,,,,

0

0

bBb

bb

c

c

payoff functionspayoff functions

institutions

TkBAAY 1

government

bar

1

1:0

kAY

Asatisfying: for every

preliminariespreliminaries

individually efficient applied research Ba ,

1,,, BBaca

ac

1

a a a

lower

is decreasingis decreasing Ba ,

,Ba

perfect informationperfect information 111 ,, BAa

1

1,, 1

11

kAY

Baca

,Ba

1a

1,,1 11

dfBack

B

11 ba

perfect informationperfect information

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

efficient

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

better institutions do more applied research

it does not matter who does basic

perfect informationperfect information

11 ,, Bac

overall budget

111 ,, bBac

£

16

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

17

asymmetric information IIasymmetric information II

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

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

1

1,, 11

kAYBaca

the above is not possible

18


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

19


Prop:Prop: A policy is incentive compatible

if:

(i)

(ii)

(iii)

(iv)

,, ra

0 free; ,, rrBacr 0a 0, Baa

0 ar

0b

0for a

Bac ,, must bedecreasing

asymmetric information II: the government’s problemasymmetric information II: the government’s problem

subject to:

0

0

,,1max

,,

,,dfarBacBAkAY

BA

ar

0, Baa

Bacr ,,

0 ar

0

dfaA

0 free 0 rr

0

dfarB

0a

22

solutionsolution

define two functions:

Bacf

FkAyBac aa ,,

1,,

BarBrcr ,,, 00

,;BaK by:

by: 0,; Br

23

solutionsolution Bacf

FkAyBac aa ,,

1,,

,Ba

,;BaK

,;BaK ,;BaK

,;BaK

1

kAy

24

solutionsolution

,Ba

,;BaK

BarBrcr ,,, 00

0,; Br

0

c is large

Prop:Prop:

solutionsolution

0

;a

~

;Ka

0

~K

,;BaK

0,; Br

Ba ;

0,; Br

solution: solution: HighHigh social value of applied research. social value of applied research.

;Ka

0

~K

0,; Br

Ba ;


Cor:Cor:

0

;a

~

;Ka

0

~K

,;BaK

0,; Br

Ba ;

0,; Br


implementation.implementation.

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

the only thing observed is the amount of applied research

aC

;Ka

0

~K

0,; Br

Ba ;

implementation: implementation: HighHigh social value of applied research. social value of applied research.

Ka Ba ;0

-type institution

0

B


;Ka

0

~K

0,; Br

Ba ;

very high cost institution.very high cost institution.

£

a

Ka Ba ;0

-type institution

1


;Ka

0

~K

0,; Br

Ba ;

middle cost institution.middle cost institution.

01

A

B

Ba ;1

£

a

Ka

Ba ;0

-type institution

2


;Ka

0

~K

0,; Br

Ba ;

low cost institution.low cost institution.

K2

Ba ;2

A

,;2 BaK

C

£

a

0

;a

~

;Ka

0

~K

,;BaK

0,; Br

Ba ;

0,; Br



very high cost institution.very high cost institution.

0

;a

~

,;BaK

0,; Br

-type institution

Ba ;0

0

~

a

B

£

a


middle cost institution.middle cost institution.

0

;a

~

,;BaK

0,; Br

Ba ;0

A

Ba ;1

01

~

a

B

£

a


low cost institution.low cost institution.

0

;a

~

,;BaK

0,; Br

,;2 BaK

C

Ba ;0

12

Ba ;2

~

a

A

B

£

a

Ba ;0

A

Ba ;1

01

~

a

B

£

marginal cost of applied research

marginal funding for applied research

£

The end. 1. full economic costing?The end. 1. full economic costing?

a

2. implementation: 2. implementation: LowLow social value of applied research. social value of applied research.

1

kAYis (well) below 1

2. implementation: 2. implementation: LowLow social value of applied research. social value of applied research.

0

~

Ba ;

,;BaK

0,; Br

Ba ;0

Ba ;

£

a

1

kAYis (well) below 1

ThanksThanks

42

solutionsolution Bacf

FkAyBac aa ,,

1,,

,Ba

,;BaK

,;BaK ,;BaK

,;BaK

1

kAy

solution: solution: lowlow social value of applied research. social value of applied research.

0

~

Ba ;

,;BaK

0

;a

~

K

,;BaK

0,; Br 0,; Br

A Theoretical Analysis of Public Funding for Research

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