Files
Abstract
Most of the empirical literature calculating rates of return to publicly sponsored research assumes
that research is the only relevant government intervention. For most countries this assumption
is untenable. This paper shows that improperly measuring government induced market
distortions can severely bias research rate of return calculations. If the interaction between successful
research and other government interventions increases the cost of the other interventions,
then neglecting market distortions unambigously increases the calculated rate of return.
Three examples of government induced distortions show that the magnitude of the upward bias
in calculated rates of return can be extremely large - in some cases more than 100 percentage
points. A normative implication is that governments should account for interactions between
research and price interventions when determining research support levels. A positive implication
is that existing government research funding patterns are more readily explainable as reasonable
behavior by a government that accounts for these interactions.