To study how an R&D subsidy program works, we build and estimate a structural model of application and selection into a treatment program. The treatment outcome depends on the investments of both the participant and the public agency running the program. Testing the model with project level data we find that larger firms have higher marginal profitability of R&D and that rates of return on R&D are high and skewly distributed. Firms submit subsidy applications for R&D projects whose median expected discounted profit without subsidies is 500 000 euros, which is increased by 12 000 by expected subsidies. If a firm is classified as an SME, it receives higher subsidies, but conditioning on SME status, subsidies are increasing in the size of the firm. Subsidies are also increasing in technical challenge of the project, and they increase the public agency’s utility not appropriated by the applicant by 16 000 in the median. Non-applicants have lower expected subsidies and higher application costs. Application costs are inversely related to the number of previous applications and directly related to profitability shocks. Consequently, ignoring application costs severely biases the estimated rates of return upwards
