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Thinking inside the box: Optimal policy towards a footloose R&D‐intensive firm

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  • Gerda Dewit
  • Dermot Leahy

Abstract

We derive the optimal policy mix of Research and Development (R&D)‐subsidies and corporate tax rates towards a footloose R&D‐intensive firm. Increasing R&D‐subsidies strengthens the firm's incentive to offshore production. The firm's home government can offset this by offering an appropriate corporate tax concession. The optimal policy package exhibits a “Matthew principle”: higher R&D‐subsidies should typically be accompanied by lower tax rates. However, if the R&D‐subsidy exceeds a crucial threshold, a tax concession can no longer prevent offshoring. We find that it is never optimal to raise tax rates as R&D‐subsidies increase.

Suggested Citation

  • Gerda Dewit & Dermot Leahy, 2020. "Thinking inside the box: Optimal policy towards a footloose R&D‐intensive firm," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(6), pages 1921-1942, December.
    • Handle: RePEc:bla:jpbect:v:22:y:2020:i:6:p:1921-1942
    DOI: 10.1111/jpet.12478
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