Fiscal incentives for research and development

Policy Paper 03

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.