The effectiveness of subsidies revisited: Accounting for wage and employment effects in business R&D

The present paper investigates the effectiveness of public subsidies on business enterprise research in a panel of OECD countries. We contribute to the literature by explicitly distinguishing between the effects of a subsidy on R&D employment and expenditure, thereby accounting for a potential increase in scientists' wages. We employ instrumental variable regressions to address endogeneity problems of the subsidization. The results indicate that subsidies are effective in generating additional research expenditure. Expenditure for business research increases by roughly 20% more than employment. We take this as evidence that subsidies may raise scientists' wages given standard production functions.