Do Tax Incentives Increase Firm Innovation? An RD Design for R&D, Patents, and Spillovers

Abstract

We present evidence of the positive causal impacts of research and development (R&D) tax incentives on a firm’s own innovation and that of its technological neighbors (spillovers). Exploiting a change in the assets-based size thresholds that determine eligibility for R&D tax relief, we implement a Regression Discontinuity (RD) Design using administrative data. We find statistically and economically significant effects of tax relief on (quality-adjusted) patenting (and R&D) that persist up to seven years after the change. Moreover, we also find causal evidence of R&D spillovers on the innovation of technologically close peer firms. We can rule out elasticities of patenting with respect to the user cost of R&D of under 2 at the 5% level and show evidence that our large effects are likely because the treated group are more likely to be financially constrained.