Ben Lockwood, University of Warwick

We analyze the relative desirability of R\&D tax credits (TCs)  and patent boxes (PBs) as instruments for stimulating R\&D. We set up a model which allows for a variety of organisational forms within the R&D sector and where there are several  market failures, all of which imply under-investment in R\&D. There are two key features of the model. The first is that it is a closed economy, so the (international) profit shifting role for the PB is absent. The second is that there may be  an unobservable input to R&D (e.g. managerial effort) that cannot be subsidized by a TC. The government can choose a TC, a PB, and also the main rate of CIT. If there is an interior solution for the CIT, we can show: (i) when the unobservable input is absent, a PB is never used, but a TC may be, if market failure is severe enough; (ii) when the input is present, the conclusion is reversed; the TC is never used, but a PB may be. Simulation results illustrate how these results extend to the case where the CIT is at a maximum.