R&D tax incentives: a reappraisal |
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Authors: | Eren Inci |
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Institution: | (1) Department of Economics, University of Florida, Gainesville, FL 32611, USA;(2) Department of Economics and International Business, LeBow College of Business, Drexel University, 503-N Matheson Hall, 32nd and Market Streets, Philadelphia, PA 19104, USA |
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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 firm-financed 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 technological 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. |
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