Do Tax Incentives for Research Increase Firm Innovation? An Rd Design for R&D

75 Pages Posted: 18 Jul 2016 Last revised: 26 Jul 2016

See all articles by Antoine Dechezleprêtre

Antoine Dechezleprêtre

London School of Economics & Political Science (LSE)

Elias Einiö

London School of Economics & Political Science (LSE)

Ralf Martin

Imperial College London

Kieu-Trang Nguyen

London School of Economics & Political Science

John Van Reenen

London School of Economics - Centre for Economic Performance (CEP); Stanford Graduate School of Business; Institute for Fiscal Studies (IFS); Centre for Economic Policy Research (CEPR)

Date Written: July 2016

Abstract

We present evidence of a causal impact of research and development (R&D) tax incentives on innovation. 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 (even when quality-adjusted). R&D tax price elasticities are large at about 2.6, probably because the treated group is from a sub-population of smaller firms and subject to financial constraints. There does not appear to be pre-policy manipulation of assets around the thresholds that could undermine our design. Over the 2006-11 period aggregate business R&D would be around 10% lower in the absence of the tax relief scheme. We also show that the R&D generated by the tax policy creates positive spillovers on the innovations of techno-logically related firms.

Suggested Citation

Dechezleprêtre, Antoine and Einiö, Elias and Martin, Ralf and Nguyen, Kieu-Trang and Van Reenen, John Michael, Do Tax Incentives for Research Increase Firm Innovation? An Rd Design for R&D (July 2016). NBER Working Paper No. w22405. Available at SSRN: https://ssrn.com/abstract=2810915

Antoine Dechezleprêtre (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Elias Einiö

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Ralf Martin

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Kieu-Trang Nguyen

London School of Economics & Political Science ( email )

Houghton Street
London WC2A 2AE
United Kingdom

John Michael Van Reenen

London School of Economics - Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 6976 (Phone)
+44 20 7955 6848 (Fax)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom
+44 20 7240 6740 (Phone)
+44 20 7240 6136 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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