Abstract
We construct a model of innovation incorporating R&D externalities, R&D participation, financial market imperfections, and application and allocation of R&D subsidies, estimate it using Finnish R&D project level data and conduct a
welfare analysis. The intensive, not the extensive R&D margin is important. Financial market imperfections are small. Tax credits and subsidies do not reach first best R&D but increase R&D 29-47% compared to laissez-faire. Welfare effects are small: Tax credits increase welfare 1%; subsidies reduce welfare once application costs are taken into account. In terms of fiscal cost, tax credits are 90% more expensive than R&D subsidies.
welfare analysis. The intensive, not the extensive R&D margin is important. Financial market imperfections are small. Tax credits and subsidies do not reach first best R&D but increase R&D 29-47% compared to laissez-faire. Welfare effects are small: Tax credits increase welfare 1%; subsidies reduce welfare once application costs are taken into account. In terms of fiscal cost, tax credits are 90% more expensive than R&D subsidies.
| Original language | English |
|---|---|
| Publisher | Suomen Pankki |
| Number of pages | 63 |
| ISBN (Electronic) | 978-952-323-396-6 |
| Publication status | Published - 18 Jan 2022 |
| MoE publication type | D4 Published development or research report or study |
Publication series
| Name | Bank of Finland Research Discussion Papers |
|---|---|
| Publisher | Suomen Pankki |
| No. | 2 |
| Volume | 2022 |
| ISSN (Electronic) | 1456-6184 |
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