Tax policy and the financing of innovation

Bryce, Luis A. and Bonfatti, Roberto and Luigi, Pisano (2016) Tax policy and the financing of innovation. Journal of Public Economics, 135 . pp. 32-46. ISSN 0047-2727

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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.

Item Type: Article
Keywords: Innovation; Tax policy; Asymmetric information; Adverse selection
Schools/Departments: University of Nottingham, UK > Faculty of Social Sciences > School of Economics
Identification Number:
Depositing User: Bonfatti, Roberto
Date Deposited: 24 Feb 2016 08:18
Last Modified: 13 Mar 2018 06:21

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