Beggar Thy Neighbor? The In-State, Out-of-State, and Aggregate Effects of R&D Tax Credits

The proliferation of R&D tax incentives among U.S. states in recent decades raises two questions: (i) Are these tax incentives effective in increasing in-state R&D? (ii) How much of any increase is due to R&D being drawn away from other states? This paper answers (i) "yes" and (ii) "nearly all." The paper estimates an augmented R&D factor demand model using state panel data from 1981 to 2004. I estimate that the long-run elasticity of in-state R&D with respect to the in-state user cost is about -2.5, while its elasticity with respect to out-of-state user costs is about +2.5, suggesting a zero-sum game among states. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.