DP12155 Welfare Effects of R&D Support Policies

Author(s): Tuomas Takalo, Tanja Tanayama, Otto Toivanen
Publication Date: July 2017
Keyword(s): counterfactual, R&D subsidies, welfare
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12155

We build a structural model of the R&D subsidy process incorporating externalities, fixed costs of R&D, and financial market imperfections. We estimate the model using project level R&D and subsidy data from Finland. We conduct a counterfactual analysis of an optimal R&D tax credit policy, the first and second best policies, and laissez-faire with no support and compare them to the subsidy policy used in Finland. We find that the optimal R&D tax credit rate is 0.24, which is lower than the observed average R&D subsidy rate (0.36). R&D participation does not vary across regimes. The R&D investments and spillovers generated by the optimal R&D tax credit and subsidy policies are significantly higher than under laissez-faire but smaller than in the first and second best. Neither tax credits nor subsidies improve welfare compared to laissez-faire.