Information Transparency and the Effectiveness of R&D Tax Credits

Abstract

Using staggered changes in state-level R&D Tax Credits (RTC), I investigate the effectiveness of RTCs offered by U.S. states and their dependence on information transparency. The results show that RTCs increase aggregated patenting activities within a state, with more substantial effects observed in states with transparent information environments, as measured by state adoption of the Inevitable Disclosure Doctrine (IDD) and aggregated peer information driven by presence of public firms in the same industry. Additionally, the evidence suggests that the impact of information transparency on individual firms’ reaction to RTCs varies depending on the tradeoff between benefits (e.g., reduced cost of capital, increased innovation efficiency, and more patent transactions) and costs (e.g., spillover effects of innovation). These findings have important implications for policymakers aiming to stimulate innovation with a given budget.