The effects of regulatory and financial policy instruments on innovative behavior

Abstract

Fostering innovative activities is broadly acknowledged to be a core requirement of successful economic policy in order to achieve political aims like economic growth, high levels of employment or long-standing international competitiveness. This dissertation contributes to the discussion of the impact of regulatory and financial policy instruments on entrepreneurial decisions by investigating the effects of specific policy instruments on individuals’ innovation output and cooperation behavior. Therefore, using the methodology of laboratory experiments, the effects of three policy instruments – namely intellectual property rights, innovation contests and subsidies – are analyzed with a novel experimental design, building on a Scrabble-like word-creation task. Within this setting, individual reactions to changes in institutional parameters can be investigated while simulating a sequential innovation process. The results of the first experiment testing intellectual property rights show that intellectual property rights have a negative effect on sequential innovations as welfare is reduced significantly by 20 to 30 percent, since innovations become less frequent and less sophisticated. In the second experiment, the effects of innovation contests are examined. The results illustrate that both analyzed contests reduce the willingness to cooperate, but have no influence on the actual cooperation and the total innovation activity. The third experiment investigates the effect of subsidies on innovative behavior and cooperation. The outcomes of the experiment show a substantial crowding-out of private investment and, depending on the kind of subsidy, no positive and even negative effects on overall welfare. In the final chapter, the current literature on experimental innovation research is reviewed and the advantages and limitations of this method are discussed. Overall, it is argued that a pragmatic use of laboratory experiments in innovation research should be pursued, since this methodological approach can fruitfully complement the results of established methods in this field.