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Are Complementary Policies Substitutes? Evidence from R&D Subsidies in the United Kingdom

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  • Jacquelyn Pless

Abstract

This paper studies whether grants and tax incentives for private R&D are complements or substitutes. I use multiple quasi-experimental research designs to examine firms in the United Kingdom and find that increasing tax credit generosity substantially enhances the effect of grant funding on R&D for small firms, suggesting that the instruments are complements. Financial constraints are likely at play. The effects are strongest for firms that appear constrained, and the combination of policies increases R&D "entry." Furthermore, I find that the instruments are substitutes for larger firms, which are usually less constrained. Some alternative explanations can be ruled out.

Suggested Citation

  • Jacquelyn Pless, 2026. "Are Complementary Policies Substitutes? Evidence from R&D Subsidies in the United Kingdom," American Economic Journal: Economic Policy, American Economic Association, vol. 18(1), pages 92-126, February.
    • Handle: RePEc:aea:aejpol:v:18:y:2026:i:1:p:92-126
    DOI: 10.1257/pol.20220356
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    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy

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