Do tax incentives for research increase firm innovation? An RD Design for R&D

We present evidence of a causal impact of research and development (R&D) tax incentives on innovation. We exploit a change in the asset-based size thresholds for eligibility for R&D tax subsidies and implement a Regression Discontinuity Design using administrative tax data on UK firms. There are statistically and economically significant effects of the tax change on both R&D and patenting (even when quality-adjusted). R&D tax price elasticities are large, consistent with the fact that the treated group is drawn from a sub-population of smaller firms likely subject to financial constraints. We estimate that over the 2006-11 period aggregate business R&D would be around 10% lower in the absence of the tax relief scheme. We also show that the R&D generated by the tax policy seems to create positive spillovers on the innovations of technologically related firms.