This paper examines the impact of the R&D fiscal incentive program on
R&D by Dutch firms. Taking a factor-demand approach we measure the
elasticity of firm R&D capital accumulation to its user cost.
Econometric models are estimated using a rich unbalanced panel of firm
data covering the period 1996-2004 with firm-specific R&D user costs
varying with tax incentives. Using the estimated user cost elasticity,
we perform a cost-benefit analysis of the R&D incentive program. We find
some evidence of additionality suggesting that the level-based program
of R&D incentives in the Netherlands is effective in stimulating firms'
investment in R&D. However, the hypothesis of crowding out can be
rejected only for small firms. The analysis also indicates that the
level-based nature of the fiscal incentive scheme leads to a substantial
social dead-weight loss.
Keywords: R&D tax credits; panel data; crowding out; user-cost elasticity
JEL Classification: O32, O38, H25, H50, C23