Download This PaperBeggar Thy Neighbor? The In-State vs. Out-of-State Impact of State R&D Tax Credits
FRB of San Francisco Working Paper No. 2005-08
52 Pages Posted: 14 Jun 2005
Date Written: May 2005
Abstract
In this paper, I exploit the cross-sectional and time-series variation in R&D tax credits, and in turn the user cost of R&D, available from U.S. states between 1981-2002 to estimate the elasticity of private R&D with respect to both the within-state (internal) user cost and the out-of-state (external) user cost. To faciliate comparisons to previous studies of the R&D cost elasticity, I first estimate an R&D cost elasticity omitting external R&D costs; the estimated elasticity is negative, above unity (in absolute value), and statistically significant - a finding quite similar to that found by previous studies based on alternative data. Unlike previous studies, however, I then add the external R&D user cost to the regressions. I find the external-cost elasticity is positive and significant, raising concerns about whether having state-level R&D tax credits on top of federal credits is socially desirable. More importantly, I find the aggregate R&D price elasticity - the difference between the internal- and external-cost elasticities - is far smaller than previously estimated. In fact, the preferred specification yields a zero aggregate elasticity, suggesting a zero-sum game among states and raising questions about the efficacy of R&D tax credits more broadly.
Keywords: R&D tax credits, R&D price elasticity
JEL Classification: H25, H23, O18, O38
Suggested Citation: Suggested Citation
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