Dechezlepretre, Antoine, Einiö, Elias, Martin, Ralf, Nguyen, Kieu-Trang and Reenen, John Van (2016) Do tax incentives for research increase firm innovation? An RD design for R&D. CEP Discussion Paper, No 1413. Centre for Economic Performance, London School of Economics and Political Science, London, UK.
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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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