Appendix 1: Regarding the cost-benefit analysis, cf. box 3
Additional R&D volume
- Bang for the buck argument: How much additional R&D spending does a public euro
elicit? - The re-labelling (or fungibility) argument: The public investments provide an incentive to
label previously unlabelled R&D activity as R&D. - The price-versus-volume argument: The extra investments allow R&D personnel to raise
their wage demands, since labour supply is inelastic in the short run.
From this evidence we conclude that the amount of additional R&D volume attributable to the
public investments is equal to 50-100 pct.. The remainder is windfall gains.
Social return of the additional R&D
Based on empirical findings and the fact that Denmark is a small and open economy. These
factors mean that part of the social returns accrue to foreign consumers and foreign firms
because of international spillovers. It is therefore assumed that the return amounts to 30-70 pct.
of the additional R&D.
The social output of R&D for a large and relatively closed economy (for example the US) is
larger than the social output of R&D for a small open economy (for example Denmark). This
finding is important because many estimates of the social output on R&D are obtained for the
US.
Flow on social return
There is a certain lag of the investments. Assumed to be 2 years.
Social rate of depreciation
The literature typically finds it to be between 0-10 pct.. (Caballero and Jaffe, 1993;
Jones and Williams, 1998).
Discount rate
Is set to 6 pct. (nominal).
Risk premium
R&D is risky. Projects can fail, both because of technological reasons but also because the
market might not be ready for the project. As long as there is a certain risk it is not sufficient
just to use the rate of time preference. The estimated risk premium lies between 2-4 pct.
Social opportunity cost (distortion loss)
Public investments are not free of charge. They either have to be collected through distortionary
taxes or by lowering the expenditures elsewhere. The literature finds it to lie between 10-40 pct.
of the investments.
Administration costs government
Investments in R&D projects demand some sort of administration. These administrations costs
are assumed to make up 2 pct. of the investments.
Administration costs performers