The impact of state-level R&D tax credits on the quantity and quality of entrepreneurship

Date Issued
2019-07-01Author(s)
Fazio, Catherine
Stern, Scott
Guzman, Jorge
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https://hdl.handle.net/2144/40324Version
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Citation (published version)
Catherine Fazio, Scott Stern, Jorge Guzman. "The Impact of State-Level R&D Tax Credits on the Quantity and Quality of Entrepreneurship." National Bureau of Economic Research Working Paper,Abstract
The acceleration of start-up activity is often cited as a rationale for the R&D tax credit, a key
innovation policy instrument adopted increasingly by US states over the past quarter century.
While there is a strong empirical base linking the R&D tax credit to increased R&D expenditures
and innovation, prior work has not provided causal evidence that this policy effects the rate of
formation and growth potential of new businesses. This paper combines data from the US
Startup Cartography Project with the Panel Database on Incentives and Taxes to implement a
difference-in-differences estimate of the impact of the R&D tax credit on the quantity and
quality-adjusted quantity of entrepreneurship. Our key finding is that the R&D tax credit is
associated with a significant long-term impact on both the overall quantity and quality-adjusted
quantity of entrepreneurship, with the bulk of the effect materializing more than five years after
the policy is enacted. These findings stand in contrast to an analysis of the adoption of state-level
investment tax credits. There, we observe no long-term impact on the quantity of
entrepreneurship but a marked decline in the rate of formation of growth-oriented startups over
time. Combined with other evidence regarding the efficacy of R&D tax credits in spurring
innovative investment, our results shed light on the potential for this fiscal policy to also
stimulate the formation of growth-oriented start-ups.
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© 2019 by Catherine Fazio, Jorge Guzman, and Scott Stern. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit,including © notice, is given to the source. This article appears in OpenBU by permission of one of its authors.Collections
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