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R&D tax credits and innovation

Author

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  • Melnik, Walter
  • Smyth, Andrew

Abstract

Previous work suggests that research and development (R&D) tax credits increase R&D expenditure. We exploit the staggered adoption of state-level R&D tax credits in the United States to examine their effect on innovation itself. In particular, we consider ten commonly-studied patent characteristics that have received little or no attention in the extant literature on R&D incentives. Our empirical approach suggests that R&D tax credits reduce the user cost of R&D and increase R&D expenditure, but we find no aggregate evidence that such credits increase patenting in credit-adopting states. Nor do credits increase the scientific quality of patents, as captured by patent citations. On the other hand, R&D tax credits increase patent novelty and we see large and significant increases in the market value of patents in credit-adopting states. All of our aggregate results are driven by states with larger effective credits and by larger firms, because such firms produce the vast majority of patents. These results have important implications for R&D public policy.

Suggested Citation

  • Melnik, Walter & Smyth, Andrew, 2024. "R&D tax credits and innovation," Journal of Public Economics, Elsevier, vol. 236(C).
  • Handle: RePEc:eee:pubeco:v:236:y:2024:i:c:s0047272724000938
    DOI: 10.1016/j.jpubeco.2024.105157
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    Citations

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    Cited by:

    1. Dirk Czarnitzki & Malte Prüfer, 2024. "The Interplay between Public Procurement of Innovation and R&D Grants: Empirical Evidence from Belgium," Working Papers of Department of Management, Strategy and Innovation, Leuven 746875, KU Leuven, Faculty of Economics and Business (FEB), Department of Management, Strategy and Innovation, Leuven.

    More about this item

    Keywords

    Research and development; Innovation; Patents; Tax credits; State taxation;
    All these keywords.

    JEL classification:

    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue

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