Welfare Effects of R&D Support Policies

69 Pages Posted: 18 Oct 2017 Last revised: 21 Jan 2022

See all articles by Tuomas Takalo

Tuomas Takalo

Bank of Finland

Tanja Tanayama

Government of the Republic of Finland - National Audit Office of Finland

Otto Toivanen

Aalto University - Department of Economics; KU Leuven - Faculty of Business and Economics (FBE); CEPR; Helsinki Center of Economic Research (HECER)

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Date Written: October 16, 2017

Abstract

We conduct a welfare analysis of R&D subsidies and tax credits using a model of innovation policy in corporating externalities, limited R&D participation and financial market imperfections. We estimate the model using R&D project level data from Finland. The optimal R&D tax credit rate (0.24) is lower than the average R&D subsidy rate (0.36). The intensive, not the extensive margin of R&D is important for policy. Tax credits and subsidies increase R&D investments and spillovers compared to laissez-faire but to levels below the first best. R&D support policies don't improve welfare.

Keywords: R&D subsidies, R&D tax credits, extensive and intensive margin, welfare, counterfactual, economic growth

JEL Classification: O38, O31, L53, C31

Suggested Citation

Takalo, Tuomas and Tanayama, Tanja and Toivanen, Otto, Welfare Effects of R&D Support Policies (October 16, 2017). Bank of Finland Research Discussion Paper No. 30/2017, Available at SSRN: https://ssrn.com/abstract=3055069

Tuomas Takalo (Contact Author)

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

Tanja Tanayama

Government of the Republic of Finland - National Audit Office of Finland ( email )

Antinkatu 1
P.O. Box 1119
Helsinki, FIN-00101
Finland

Otto Toivanen

Aalto University - Department of Economics ( email )

PO Box 1210
FI-00101 Helsinki
Finland

KU Leuven - Faculty of Business and Economics (FBE) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

CEPR ( email )

London
United Kingdom

Helsinki Center of Economic Research (HECER)

FI-00014 Helsinki
Finland

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