| 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. |