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How effective are level-based R&D tax credits? Evidence from the Netherlands

Author

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  • Lokshin, Boris

    (Maastricht University, and UNU-MERIT)

  • Mohnen, Pierre

    (UNU-MERIT, Maastricht University, and CIRANO)

Abstract

This paper examines the impact of the R&D fiscal incentive program on R&D by Dutch firms. Taking a factor-demand approach we measure the elasticity of firm R&D capital accumulation to its user cost. Econometric models are estimated using a rich unbalanced panel of firm data covering the period 1996-2004 with firm-specific R&D user costs varying with tax incentives. Using the estimated user cost elasticity, we perform a cost-benefit analysis of the R&D incentive program. We find some evidence of additionality suggesting that the level-based program of R&D incentives in the Netherlands is effective in stimulating firms' investment in R&D. However, the hypothesis of crowding out can be rejected only for small firms. The analysis also indicates that the level-based nature of the fiscal incentive scheme leads to a substantial social dead-weight loss.

Suggested Citation

  • Lokshin, Boris & Mohnen, Pierre, 2010. "How effective are level-based R&D tax credits? Evidence from the Netherlands," MERIT Working Papers 2010-040, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    • Handle: RePEc:unm:unumer:2010040
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    More about this item

    Keywords

    R&D tax credits; panel data; crowding out; user-cost elasticity;
    All these keywords.

    JEL classification:

    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • 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
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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