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

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.

---

Antoine Dechezleprêtre, Elias Einiö, Ralf Martin, Kieu-Trang Nguyen and John Van Reenen

11 March 2016     Paper Number CEPDP1413

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

This CEP discussion paper is published under the centre's Growth programme.