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Do tax incentives for research increase firm innovation? An RD Design for RD

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

Abstract

We present the first evidence showing causal impact of research and development (R&D) tax incentives on innovation outcomes. 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, with no evidence of a decline in the quality of innovation. R&D tax price elasticities are large at about 2.6, probably because the treated group is from a sub-population subject to financial constraints. There does not appear to be pre-policy manipulation of assets around the thresholds that could undermine our design, but firms do adjust assets to take advantage of the subsidy post-policy. We estimate that over 2006-11 business R&D would be around 10% lower in the absence of the tax relief scheme.

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  • Dechezleprêtre, Antoine & Einiö, Elias & Martin, Ralf & Nguyen, Kieu-Trang & Van Reenen, John, 2016. "Do tax incentives for research increase firm innovation? An RD Design for RD," Working Papers 73, VATT Institute for Economic Research.
  • Handle: RePEc:fer:wpaper:73
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    More about this item

    Keywords

    RD; patents; tax; innovation; Regression Discontinuity design; Economic growth; Taloudellinen kasvu; Taxation; Verotus; H230 - Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies; H250 - Business Taxes and Subsidies including sales and value-added (VAT); H320 - Fiscal Policies and Behavior of Economic Agents: Firm; O310 - Innovation and Invention: Processes and Incentives; O320 - Management of Technological Innovation and RD;
    All these keywords.

    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • M0 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - General

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