It is often argued that since the social return to R&D exceeds the private return, the government should provide incentives for R&D expenditure. This paper considers the issue of the impact of such incentives on the fiscal position of the government, using a simple comparative static model. In particular, it is argued that it is possible that the social return from R&D might be sufficient to allow R&D incentives to more than pay for themselves. The model is calibrated to examine what values of the key parameters are required in order for this conclusion to hold.
Policy Paper 03