MSI Working Paper

We analyze behavioral additionality effects related to wage-based R&D tax credits and their dependence on the joint use of R&D subsidies. Using a matching approach combined with multivariate probit analyses on survey data of Belgian firms in 2006-2010, we find that tax credits cause firms not to ‘do more of the same’ (scale) nor ‘do the same thing faster’ (speed) but rather induce them to make more resolute changes to their R&D approach. In particular, firms are found to initiate additional R&D projects and tip the R&D-balance more towards research relative to development. The latter effect indicates that tax credits nudge firms’ behavior towards those activities characterized by the most severe market failures. Furthermore, the behavioral additionality effects are found to increase with the relative importance of the tax credit for the firm. Finally, the effects of tax credits are positively moderated by R&D subsidies i.e. we find that a policy mix combining tax credits and subsidies is more effective than using tax credits only.nrpages: 31status: publishe