- Published
- 2021-06-30
- Venue
- American Economic Review, vol. 111, no. 7, pp. 2065-2100
- Cited by
- 450
- Open access
- Yes, green
- DOI
- 10.1257/aer.20191758
Abstract
We study a Chinese policy that awards substantial tax cuts to firms with R&D investment over a threshold or “notch.” Quasi-experimental variation and administrative tax data show a significant increase in reported R&D that is partly driven by firms relabeling expenses as R&D. Structural estimates show relabeling accounts for 24.2 percent of reported R&D and that doubling R&D would increase productivity by 9 percent. Policy simulations show that firm selection and relabeling determine the cost-effectiveness of stimulating R&D, that notch-based policies are more effective than tax credits when relabeling is prevalent, and that modest spillovers justify the program from a welfare perspective. (JEL D22, D24, H25, O14, O32, P31, P35)