Fiscal Policy and Stimuli to R&D Investment with Uncertainty

Abstract

Two models are examined in this study, namely, one incorporating exogenous investment and one incorporating endogenous investment and R&D uncertainty. A lump-sum subsidy results in larger net tax revenues than does lowering the profit tax rate in the former model, while this may not be the case in the latter. In the latter model, a proportional investment subsidy generates the highest net tax revenues with low market volatility and always results in larger net tax revenues than does lowering the profit tax rate.