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We study the optimal design of corporate taxation and R&D policies as a dynamic mechanism design problem with spillovers. Firms have heterogeneous research productivity, and that research productivity is private information. There are non‐internalized technological spillovers across firms, but the asymmetric information prevents the government from correcting them in the first best way. We highlight that key parameters for the optimal policies are (i) the relative complementarities between observable R&D investments, unobservable R&D inputs, and firm research productivity, (ii) the dispersion and persistence of firms' research productivities, and (iii) the magnitude of technological spillovers across firms. We estimate our model using firm‐level data matched to patent data and quantify the optimal policies. In the data, high research productivity firms get disproportionately higher returns to R&D investments than lower productivity firms. Very simple innovation policies, such as linear corporate taxes combined with a nonlinear R&D subsidy—which provides lower marginal subsidies at higher R&D levels—can do almost as well as the unrestricted optimal policies. Our formulas and theoretical and numerical methods are more broadly applicable to the provision of firm incentives in dynamic settings with asymmetric information and spillovers, and to firm taxation more generally.
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Productivity Dispersion, Misallocation, and Reallocation Frictions: Theory and Evidence from Policy Reforms
Recent research maintains that the observed productivity variation across firms reflects resource misallocation and concludes that large GDP gains may be obtained from market-liberalizing polices. Our theoretical analysis examines the impact on productivity dispersion of reallocation frictions in the form of costs of entry, operation, and restructuring, and shows that reforms reducing these frictions may raise dispersion of productivity across firms. Contrary to conventional wisdom, the model does not imply a negative relationship between aggregate productivity and productivity dispersion. Our empirical analysis focuses on episodes of liberalizing policy reforms in the US and six East European transition economies. We find that deregulation of US telecommunications equipment manufacturing is associated with increased, not reduced, productivity dispersion, and that every transition economy in our sample shows a sharp rise in dispersion after liberalization. Productivity dispersion under communist central planning is similar to that in the US, and it rises faster in countries liberalizing more quickly. We also find that lagged productivity dispersion predicts higher future productivity growth, likely because dispersion reflects experimentation by both entering and incumbent firms. The analysis suggests there is no simple relationship between the policy environment and productivity dispersion.
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- Award ID(s):
- 1719201
- PAR ID:
- 10275731
- Date Published:
- Journal Name:
- Comparative Economic Studies
- ISSN:
- 0888-7233
- Format(s):
- Medium: X
- Sponsoring Org:
- National Science Foundation
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- Free Publicly Accessible Full Text
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Accepted Manuscript1.0
- Journal Article:
- https://doi.org/10.1057/s41294-021-00157-0
