Economics Quarterly Announces Best Paper of 2022
Jun 19-2023
Enhancing innovative capabilities has been set as one major goal of China’s economic and social development in its Fourteenth Five Year Plan. A paper by three researchers, which appeared in the second edition of the 2022 volume of Economics Quarterly, looks into how to design stimulating policies for innovation with the aim of avoiding government malfunction-induced loss to the largest possible extent. It has been named the journal’s 2022 best paper due to its cogent logic, smooth flow of writing, profound theoretical research explained in simple terms, and practical policy advice.
The authors are Mr. Li Wenjian of School of Economics, Zhejiang University; Mr. Weng Xi of Guanghua School of Management, Peking University; and Mr. Gong Liutang, who works for both Guanghua School of Management, Peking University, and Beijing Technology and Business University.
China’s R&D investment amounted to 3.09 trillion yuan in 2022, the second highest in the world. Government funding was the second largest source for R&D expenditures, at about 20% of the total. Such colossal government outlays drew extensive attention. However, little is understood about how the government should motivate innovation. Supporters of innovation-stimulating policies point out that innovation is a key driver of economic development, but entrepreneurs, when making decisions, tend not to consider the positive externality of innovation. Opponents of the view highlight government malfunction issues caused by industrial policies. Whether the government should implement industrial policies has become a major debate topic for China’s economic circle in the 21st century.
The paper, How Governments Should Stimulate Innovation – A Research Based on Proxy-Agent Theory, cuts a creative path to explore the design of innovation-stimulating policies. On one hand, understanding how the government can best motivate innovation is the prerequisite for answering if the government ought to spur innovation at all. On the other hand, when decisions to stimulate innovation have been made, it becomes imperative to analyze how to use funds optimally.
Editors of the Economics Quarterly believe the research makes multi-layered contributions. Notionally, the paper distinguishes between ‘ex post government malfunction’ and ‘ex-ante government malfunction’, as well as ‘ex post favorable treatment’ and ‘ex ante favorable treatment’ in innovation-stimulating policies, thereby laying the theoretical groundwork for policy analysis and design. In addition, the research draws inspirations from the proxy-agent theory to craft an innovation-stimulating mechanism that is worthy of practical uses. Lastly, the authors delve into wellbeing analysis and find that effective auditing, checking and supervising can benefit all relevant parties by lowering informational asymmetry between the government and enterprises.
