Tax policy and the financing of innovation

Luis A. Bryce Campodonico, Roberto Bonfatti and Luigi Pisano

Journal of Public Economics, 2016, vol. 135, issue C, 32-46

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.

Keywords: Innovation; Tax policy; Asymmetric information; Adverse selection (search for similar items in EconPapers)
JEL-codes: E60 G38 O38 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:135:y:2016:i:c:p:32-46

DOI: 10.1016/j.jpubeco.2015.12.010

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