Agglomeration, Innovation, and Spatial Reallocation: The Aggregate Effects of R&D Tax Credits

IMF Working Papers, July 1, 2022

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Canonical URL: Agglomeration, Innovation, and Spatial Reallocation: The Aggregate Effects of R&D Tax Credits

Investigates the aggregate effects of R&D tax credits in the US.
Models the policy channel: R&D tax credits subsidize R&D activity and credit rates vary between states, generating spatial and dynamic effects.
Framework: constructs an endogenous growth model with spatial heterogeneity and agglomeration spillovers in innovation.
Key mechanism: aggregate outcomes depend on the spatial distribution of the population, which is endogenous and reacts to policy.

R&D tax credits have both spatial effects (through variation in state credit rates) and dynamic effects (through innovation subsidies).
Agglomeration spillovers in innovation imply that where R&D activity locates matters for aggregate outcomes.
The endogenous distribution of population amplifies or attenuates aggregate effects because population location responds to R&D subsidy policies.

Optimal policy design should account for spatial heterogeneity: local R&D subsidies can be tailored to maximize aggregate welfare.
Identifies a set of local R&D subsidies that maximize aggregate welfare within the model framework.

Endogenous growth model with:
- Spatial heterogeneity.
- Agglomeration spillovers in innovation.
- Endogenous population distribution that responds to policy.
Policy instrument analyzed: R&D tax credits / R&D subsidy rates varying across states.

Subjects: Credit ratings, Labor, Money, Population and demographics, Production, Productivity, Tax allowances, Taxes, Wages.
Keywords: agglomeration, aggregate outcome, Credit ratings, elasticity of agglomeration, elasticity of congestion, Global, innovation, Productivity, R&D activity, R&D subsidy, R&D tax credit rate, R&D tax credits, Tax allowances, Wages, welfare effect.