Welfare Effects of R&D Support Policies

66 Pages Posted: 25 Jul 2017

See all articles by Tuomas Takalo

Tuomas Takalo

Bank of Finland

Tanja Tanayama

Government of the Republic of Finland - National Audit Office of Finland

Otto Toivanen

Aalto University - Department of Economics; KU Leuven - Faculty of Business and Economics (FBE); CEPR; Helsinki Center of Economic Research (HECER)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2017

Abstract

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.

Keywords: counterfactual, R&D subsidies, welfare

Suggested Citation

Takalo, Tuomas and Tanayama, Tanja and Toivanen, Otto, Welfare Effects of R&D Support Policies (July 2017). CEPR Discussion Paper No. DP12155, Available at SSRN: https://ssrn.com/abstract=3008336

Tuomas Takalo (Contact Author)

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

Tanja Tanayama

Government of the Republic of Finland - National Audit Office of Finland ( email )

Antinkatu 1
P.O. Box 1119
Helsinki, FIN-00101
Finland

Otto Toivanen

Aalto University - Department of Economics ( email )

PO Box 1210
FI-00101 Helsinki
Finland

KU Leuven - Faculty of Business and Economics (FBE) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

CEPR ( email )

London
United Kingdom

Helsinki Center of Economic Research (HECER)

FI-00014 Helsinki
Finland

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
0
Abstract Views
309
PlumX Metrics