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Welfare Effects of R&D Support Policies

Listed author(s):
  • Takalo, Tuomas
  • Tanayama, Tanja
  • Toivanen, Otto

We build a structural model of the R&D subsidy process incorporating externalities, fixed costs of R&D, and financial market imperfections. We estimate the model using project level R&D and subsidy data from Finland. We conduct a counterfactual analysis of an optimal R&D tax credit policy, the first and second best policies, and laissez-faire with no support and compare them to the subsidy policy used in Finland. We find that the optimal R&D tax credit rate is 0.24, which is lower than the observed average R&D subsidy rate (0.36). R&D participation does not vary across regimes. The R&D investments and spillovers generated by the optimal R&D tax credit and subsidy policies are significantly higher than under laissez-faire but smaller than in the first and second best. Neither tax credits nor subsidies improve welfare compared to laissez-faire.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 12155.

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Date of creation: Jul 2017
Handle: RePEc:cpr:ceprdp:12155
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