Fiscal Policy, R&D and Innovation

University essay from Lunds universitet/Nationalekonomiska institutionen

Abstract: Innovation, made possible through Research and Development (R&D) is a major driving force of economic growth. Due to its quasi-public good nature investments in R&D is usually below the social optimum. Governments use different policy instruments to correct this market failure. In this paper, the Westmore, 2014 paper is reexamined for the role of two fiscal policy instruments, Tax Incentives and Direct Funding, in stimulating private investments in R&D. The analysis is extended for 27 OECD countries in the time period 2000-2017 using Dynamic Fixed Effects Model. Further, the role of income inequality in the private investment in R&D is explored.

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