UCLA

This dissertation explores the incentives that drive political leaders to invest in Research and Development (R&D) policies even though such investments are risky, less visible to the public than many other options, and typically bear fruit only after the incumbent has already left office. I provide several explanations and explore the economic consequences of political incentives that shape government R&D policy.

I argue that the mere policy choice of investing in R&D improves the incumbent’s perceived competence among voters. Using a formal signaling model, I show that, under a set of conditions, the separating equilibrium is possible: a competent incumbent invests in (riskier) R&D policy, while a less competent incumbent invests in safe projects (infrastructure). I test the conclusions of this model by conducting survey experiments in the US and Russia and find that in both countries, respondents see pro-R&D politicians as more competent compared to control politicians.

Turning to a setting with weak institutions, I show that government can use investment in R&D as a vehicle for rent seeking, as the risky nature of such invest- ment makes it hard to distinguish between policy failure and technology failure. Due to the inherent difficulty of accessing the value of patents produced with government funding, such funding encourages the growth of low-quality patents. The proliferation of low-quality patents in the technology market reduces the incentives to produce high-quality patents – a typical “lemon problem.” Such problems arise even if the government has a significant stake in technological development. In a cross-country setting, I document the wide discrepancies in the impact of government funding on the creation of patented technologies and show that countries with higher levels of corruption have a greater patenting efficiency, creating more patents on paper, but that does not translate into actual technological development. To achieve causal interpretation, I apply the difference-in-difference approach to data on Russia’s government policy to support nanotechnology to show how government support for innovation reduces the overall quality of patents in the supported field.

Technological progress is an important factor in economic development, yet it can be a destabilizing force, upending the existing balance of power in the economy. Such changes can be unwelcome to a government that would like to preserve the status quo. Yet instead of stifling innovation, the incumbent can channel it into the hands of loyal supporters by directing government grants towards them and providing additional benefits that are contingent on the success of the R&D project. Using the trajectory balancing approach for all companies that applied for the Russian program of R&D support via government subsidy, I show that politically connected companies are more likely to obtain government R&D grants. Furthermore, they reap greater benefits from it in form of improved gross profits and return on assets, compared to unconnected companies. I also find that they receive greater volumes of government contracts during the phase of assessment of the progress of their R&D project.