Association for Public Policy Analysis & Management

State R&D Tax Credits are the most popular way for states to incentivize R&D spending. The issue is that the free movement of people, ideas, and resources across state lines means that the state which offers the tax credit might not receive the innovative of the R&D they subsidized. According to endogenous growth theory, firms are not the sole beneficiaries of R&D they perform. Instead, the benefits spill over into the rest of the economy. One of the benefits of R&D is an increase in innovative activity, and tax credits that produce R&D should increase innovative activity in a local economy. Using a bayesian structural equation model this paper seeks to understand the direct and indirect effects of R&D tax credits on innovation.