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Do tax incentives for research increase firm innovation? An RD design for R&D

Author

Listed:
  • Antoine Dechezlepretre
  • Elias Einio
  • Ralf Martin
  • Kieu-Trang Nguyen
  • John Van Reenen
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 prepolicy 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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  • Antoine Dechezlepretre & Elias Einio & Ralf Martin & Kieu-Trang Nguyen & John Van Reenen, 2016. "Do tax incentives for research increase firm innovation? An RD design for R&D," GRI Working Papers 230, Grantham Research Institute on Climate Change and the Environment.
    • Handle: RePEc:lsg:lsgwps:wp230
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    References listed on IDEAS

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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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