Working Paper

This paper provides evidence at the firm- and worker-level of how R&D tax credits targeting small innovating firms distort production and earnings. I take advantage of an eligibility change in Canada's largest R&D program in 2004 that allowed firms to increase their production while maintaining eligibility for the generous program. Using matched employer-employee data, I find no impact on R&D spending in the short-term, but significant increases in value-added per worker following the reform. The results are primarily driven by less financially constrained firms, emphasizing the growth distortion effect of the eligibility threshold. Productivity growth results in earnings increasing on average by 2%. Incumbent and lower-earning workers benefited the most, while women saw no increase. Finally, I find no impact on employment, although this is masked by an increase in new hires and departures following the reform. Hiring policy tilts towards recruiting workers coming from higher firm quality, but I see no effect on the individual quality of new recruits. 

Work in Progress