Essays on public policies and innovation

This dissertation investigates various sources of market failure and inefficiency in the allocation of resources to innovation and their implications for public policies. After a brief survey of the existing literature in Chapter I, Chapters II and III examine models of sequential innovations in which successful firms in research can enter the product market with a cost advantage over incumbents and destroy their monopoly rents. In Chapter II the focus is on how the strategic behaviour of firms competing for the market distorts the timing of adoption of new technologies. In particular, established firms have an incentive to over-invest in order to delay the entry of innovating firms and increase the length of their dominant position in the product market. The analysis reveals that the taxation of profits leads to the earlier adoption of new technologies in this context, and that tax systems which lower the after-tax return to capital and increase the cost of R&D may be welfare improving.; In Chapter III the focus is on asymmetric information problems between innovating firms and venture capital financiers. Innovators are financed by venture capitalists in exchange for a share of future profits. Because of their specialized knowledge, venture capitalists also provide advice to innovators which increases the likelihood of success. Various distortions in the level of effort provided by venture capitalists, the size of innovations and the timing of R&D activities are examined. In contrast to the recent venture capital literature, when considering sequential innovations of endogenous size, a tax on capital gains may be welfare improving. And surprisingly, in the free entry equilibrium, the tax system must increase the cost of R&D to induce the optimal level of effort from venture capitalists.; Chapter IV examines innovation in the public provision of services under asymmetric information between the government and a public agency and emphasizes how the information generated by a parallel private market can be used to induce higher innovation in the public sector. The analysis considers asymmetric information with respect to production costs, the quality of services and the innovation effort of public agencies. In this context, the optimizing behaviour of consumers and private firms is shown to produce observable information that the government can use in designing the agencies' funding contracts.