The role of peer effects in firms' usage of R&D tax exemptions

Abstract

Survey evidence suggests that firms are insufficiently aware of newly introduced R&D support measures due to the complexity of the public supportlandscape. Asaresult,adoptionisslowandincomplete,whichimpliesthateligiblefirmsleavemoneyonthetable.Wehypothesizethatakeycopingmechanisminvolvesfirmsrelyingontheirpeers’behaviourtoinformtheirownadoptiondecision.Wetestthishypothesisbyanalysingfirms'firstuseofanewly-introducedR&DtaxexemptionschemeinBelgium.Weidentifyendogenouspeereffectsinindustry-andlocation-basedpeergroupsbyexploitingtheintransitivityinfirms’networksaswellasvariationinpeergroupsize.Theresultsshowthatfirms’decisionstouseR&Dtaxexemptionsareinfluencedbythechoicesoftheirpeers,primarilyinthetimewindowimmediatelyfollowingtheirintroduction.ThefindingssuggestthattheefficacyofR&Dpolicycanbeimprovedbyaccountingforthestructureoffirmnetworksinthecommunicationofnewsupportinitiatives.

JEL classifications: D83 D85 L14 O38 A B S T R A C T Survey evidence suggests that firms are insufficiently aware of newly introduced R&D support measures due to the complexity of the public support landscape. As a result, adoption is slow and incomplete, which implies that eligible firms leave money on the table. We hypothesize that a key coping mechanism involves firms relying on their peers' behaviour to inform their own adoption decision. We test this hypothesis by analysing firms' first use of a newly-introduced R&D tax exemption scheme in Belgium. We identify endogenous peer effects in industry-and location-based peer groups by exploiting the intransitivity in firms' networks as well as variation in peer group size. The results show that firms' decisions to use R&D tax exemptions are influenced by the choices of their peers, primarily in the time window immediately following their introduction. The findings suggest that the efficacy of R&D policy can be improved by accounting for the structure of firm networks in the communication of new support initiatives.