Tax policy and the financing of innovation

Bryce, Luis A.; Bonfatti, Roberto; Luigi, Pisano

Abstract

We study tax policy in a Schumpeterian growth model with asymmetric information in the financing of innovation. Investors cannot a priori distinguish between more or less talented entrepreneurs. Net-worth allows talented entrepreneurs to self-invest and avoid being pooled with less talented entrepreneurs in the credit market. Increasing net-worth boosts innovation even when financed through higher profit taxes. Taxing consumption effectively raises net-worth and subsidizes profits simultaneously. Sufficiently taxing consumption implements the social optimum free of adverse selection. If forced to tax consumption less, the government implements a second best allocation with adverse selection when boosting net-worth enough to avoid adverse selection requires taxing profits excessively.

Citation

Bryce, L. A., Bonfatti, R., & Luigi, P. (2016). Tax policy and the financing of innovation. Journal of Public Economics, 135, https://doi.org/10.1016/j.jpubeco.2015.12.010

• Journal Article Type: Article
• Acceptance Date: Dec 18, 2015
• Online Publication Date: Jan 7, 2016
• Publication Date: Mar 1, 2016
• Deposit Date: Feb 24, 2016
• Publicly Available Date: Feb 24, 2016
• Journal: Journal of Public Economics
• Print ISSN: 0047-2727
• Electronic ISSN: 0047-2727
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 135
• DOI: https://doi.org/10.1016/j.jpubeco.2015.12.010
• Keywords: Innovation; Tax policy; Asymmetric information; Adverse selection
• Public URL: https://nottingham-repository.worktribe.com/output/977543
• Publisher URL: http://www.sciencedirect.com/science/article/pii/S0047272715002145