Taxation and Incentives to Innovate: A Principal-Agent Approach

Diego d'Andria

FinanzArchiv: Public Finance Analysis, 2016, vol. 72, issue 1, 96-123

Abstract: A principal-agent model with multiple job tasks is used to explore the effects of different tax schemes on innovation in a pure knowledge economy with bootleg innovation. Corporate taxes and labor income taxes can affect both the firm owner's and the employee's incentives to commit to innovative tasks, when the former compensates the latter (a manager or a technical or R&D employee) by means of variable pay tied to measures of the company's success. Results point to complementary roles between patent-box tax incentives and reductions in the tax rate levied on profit-sharing schemes, and they show that a revenue-neutral reform substituting the latter for the former is always possible. The complementarity holds, albeit with different relative importance for the two tax incentives, also with nondeductible labor costs and with a stochastic innovation value coupled with a risk-averse agent.

Keywords: tax incentives for R&D; patent box; inventor compensation; profit-sharing schemes; incentives to innovate (search for similar items in EconPapers)
JEL-codes: H2 J33 O31 (search for similar items in EconPapers)
Date: 2016
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Working Paper: Taxation and incentives to innovate: a principal-agent approach (2014)
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DOI: 10.1628/001522108X14557023949337

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