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R&D tax incentives: A reappraisal

İnci, Eren (2007) R&D tax incentives: A reappraisal. [Working Paper / Technical Report] Sabanci University ID:SU_FASS_2007/0008

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Abstract

This paper examines R&D tax incentives in oligopolistic markets. We characterize the conditions under which tax incentives reach the socially desirable level of firmfinanced R&D spending. The outcome of the market depends not only on the level of technological spillover in the industry but also on the degree of strategic interaction between the firms. One major result emerges from the model: The socially desirable level of R&D investment is not necessarily reached by subsidizing R&D. When the sector spillover is sufficiently low, the government might want to tax R&D investments, and this result does not necessarily arise because firms are overinvesting in R&D. There are also cases in which an R&D tax is desirable even though firms are underinvesting in R&D compared with the first-best optimum. In practice, this theoretical finding calls for a lower sales tax combined with an R&D subsidy in oligopolistic industries with high technological spillovers, and a lower sales tax combined with an R&D tax in oligopolistic industries with low technological spillovers.

Item Type:Working Paper / Technical Report
Uncontrolled Keywords:oligopoly, public policy, R&D tax incentive, spillover, strategic interaction
Subjects:H Social Sciences > HD Industries. Land use. Labor
ID Code:4920
Deposited By:Eren İnci
Deposited On:08 Oct 2007 09:51
Last Modified:11 Jan 2008 15:04

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