PUBLICLY FINANCED R&D CAPITAL, R&D TAX POLICY, AND PRODUCTIVITY EFFECTS ON THE PRIVATE SECTOR

In this dissertation I evaluate the federal government's direct and indirect role in stimulating private R&D investment and productivity by estimating a translogarithmic cost function under different assumptions of firms' behavior and market equilibrium conditions. First, I study the existence and extent of an externality from publicly financed R&D capital and the way it affects the cost structure of manufacturing industries at the two-digit level. Second, I provide econometric evidence of the effectiveness of R&D tax policy in stimulating privately funded R&D and output growth. Finally, I evaluate these policies by estimating the social rate of return of publicly funded R&D and the additional privately funded R&D expenditures generated by the R&D tax policy relative to the foregone government tax revenues.; In contrast to the existing literature, my findings show that given an industry's output, publicly financed R&D capital reduces the production cost in all industries in the sample, suggesting the existence of an externality from publicly financed R&D. Moreover, when output is allowed to adjust, publicly financed R&D causes output to increase and cost per unit of output to decline. Labor input is a weak complement of publicly financed R&D while intermediate inputs are substitutes. Also, publicly funded R&D crowds out physical capital in all industries, induces private R&D in some of the major receivers of publicly funded R&D support, and crowds out private R&D in the remaining industries. Finally, I calculate that the social rate of return of publicly funded R&D for the industries in the sample ranges from 6% to 23%. I also estimate that the incremental R&D tax credit introduced by the Economic Recovery Act of 1981 has a rather moderate effect in stimulating R&D. At a given level of output, a 1% increase of incremental R&D tax credit induces {dollar}1.3 of additional R&D expenditures per dollar of lost government tax revenue. However, when the induced output effect is considered, the stimulus to private R&D is much higher.