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Abstract:

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CEP Discussion Paper
Do Tax Incentives for Research Increase Firm Innovation? An RD Design for R&D
Antoine Dechezleprêtre, Elias Einiö, Ralf Martin, Kieu-Trang Nguyen and John Van Reenen March 2016
Paper No' CEPDP1413:
Full Paper (pdf)

JEL Classification: O31; O32; H23; H25; H32


Tags: r&d; patents; tax; innovation; regression discontinuity design

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 technologically related firms.