Abstract
We analyze the effect of state subsidies on early stage investments. In a two period investment model with incomplete stage financing contracts we describe optimal and second best investment levels. Optimality depends on how we include external effects. The subsidies might be designed to maximize early stage investments, to use state money most efficiently to mobilize private investment capital, or to contribute to greater efficiency without regard to external effects. Refinancing subsidies can be optimal under all three perspectives and are always optimal under the first and last of the mentioned approaches. A comparison of different types of subsidies gives a further insight into the optimal design of subsidies.
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