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Do tax Incentives for Research Increase Firm Innovation? An RD Design for R&D

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  • Antoine Dechezleprêtre
  • Elias Einiö
  • Ralf Martin
  • Kieu-Trang Nguyen
  • John Van Reenen

Abstract

We present evidence of a causal impact of research and development (R&D) tax incentives on innovation. We exploit a change in the asset-based size thresholds for eligibility for R&D tax subsidies and implement a Regression Discontinuity Design using administrative tax data on the population of UK firms. There are statistically and economically significant effects of the tax change on both R&D and patenting (even when quality-adjusted). R&D tax price elasticities are large at about 2.6, probably because the treated group is from a sub-population of smaller firms and subject to financial constraints. There does not appear to be pre-policy manipulation of assets around the thresholds that could undermine our design. Over the 2006-11 period aggregate business R&D would be around 10% lower in the absence of the tax relief scheme. We also show that the R&D generated by the tax policy creates positive spillovers on the innovations of techno-logically related firms.

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  • Antoine Dechezleprêtre & Elias Einiö & Ralf Martin & Kieu-Trang Nguyen & John Van Reenen, 2016. "Do tax Incentives for Research Increase Firm Innovation? An RD Design for R&D," NBER Working Papers 22405, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:22405
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    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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