Effectiveness of Fiscal Incentives for R&D: Quasi-Experimental Evidence
IMF Working Papers, March 31, 2017
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- Effectiveness of Fiscal Incentives for R&D: Quasi-Experimental Evidence
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Bibliographic details
- Authors: Irem Guceri, Li Liu
- Published: March 31, 2017
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475591170.001
Research question and identification
- Evaluates the effectiveness of R&D tax incentives given the identification problem from the simultaneous determination of companies’ tax positions and their R&D spending.
- Overcomes the identification challenge by exploiting a U.K. policy reform and using the population of corporation tax records that provide firm-level R&D expenditure.
Data and empirical approach
- Data: population of corporation tax records with precise firm-level R&D expenditure.
- Methods: difference-in-differences and other panel regression approaches applied to the quasi-experimental setting created by the U.K. policy reform.
Main findings
- Finds a positive and significant impact of tax incentives on R&D spending.
- Implied user cost elasticity estimate of around -1.6.
- Effect magnitude: translates to more than a pound in additional private R&D for each pound foregone in corporation tax revenue.
Interpretation and policy implications
- R&D tax incentives can substantially increase private R&D spending when evaluated using exogenous variation from policy reform.
- The estimated user cost elasticity of around -1.6 implies policy trade-offs where fiscal cost per unit of additional private R&D may be less than one pound of foregone tax revenue per pound of additional private R&D.
- Evidence supports the use of fiscal incentives as a tool to stimulate private sector R&D, conditional on design and targeting that create exogenous variation similar to the exploited reform.
Effectiveness of Fiscal Incentives for R&D: Quasi-Experimental Evidence — Irem Guceri, Li Liu, March 31, 2017.
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- Effectiveness of Fiscal Incentives for R&D: Quasi-Experimental Evidence