Ideas and Innovations: Which should be subsidized?

Abstract

The Bayh-Dole Act allows universities to commercialize their research. University laboratories therefore have two sources of funds: direct grants from the government and funds from commercialization. In addition to giving direct subsidies to university laboratories, the government also subsidizes the commercial sector, for example, through tax credits. Subsidies to commerce contribute indirectly to the university’s research budget, because they increase the profit from commercialization. This paper investigates the optimal mix of direct and indirect subsidies to the university, in a context where the role of university research is to turn up \ideas" for commercial investments, and the role of commerce is to turn the ideas into innovations. It also asks whether there is an argument for protecting \ideas" as well as commercializations, as is authorized by the Bayh-Dole Act. Keywords: research subsidy, tax credits, Bayh-Dole Act, research ideas