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Tax policy and the financing of innovation

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

Authors

Luis A. Bryce

Pisano Luigi



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.

Journal Article Type Article
Publication Date Mar 1, 2016
Journal Journal of Public Economics
Print ISSN 0047-2727
Electronic ISSN 0047-2727
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 135
APA6 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
DOI https://doi.org/10.1016/j.jpubeco.2015.12.010
Keywords Innovation; Tax policy; Asymmetric information; Adverse selection
Publisher URL http://www.sciencedirect.com/science/article/pii/S0047272715002145
Copyright Statement Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by-nc-nd/4.0

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Copyright Statement
Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by-nc-nd/4.0





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