On government credibility, compensation and under-investment in public research

Static political economy studies show that under-investment in public research may result because of income distributional effects--which induce opposition from groups adversely affected--and that compensation policies can mitigate opposition to public research. This paper explores the intertemporal aspects of this policy issue using a dynamic political economy model in which both public research investment and compensation policies are endogenous. Dynamic research effects create credibility problems for government compensation. Once the research investment has been made, the political incentives change for governments that maximise political support. If future compensation is not credible, then opposition to research will not fall and under-investment will result, even if the government has access to non-distortionary policy instruments for compensation. Copyright 2002, Oxford University Press.