Innovation to Keep or to Sell and Tax Incentives

Colin Davis and Laixun Zhao

No DP2022-28, Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe University

Abstract: We study how tax policy affects economic growth through entrepreneurs' choice of commercialization mode. Introducing both heterogeneous quality jumps and a leapfrog versus sell choice into the quality-ladders model, we show that entrepreneurs use high-quality innovations to leapfrog incumbent firms and become new market leaders, but sell low quality ones to incumbents. Tax incentives that promote leapfrogging slow the rate of innovation. A numerical analysis concludes that subsidies to product design improve welfare. Corporate taxes, capital gains taxes, and subsidies to market entry all harm welfare.

Keywords: Innovation based growth; Heterogenous quality improvements; Innovation sales; Corporate tax; Capital gains tax; Market entry subsidy; Product design subsidy (search for similar items in EconPapers)
JEL-codes: O31 O33 O43 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2022-06, Revised 2022-11
New Economics Papers: this item is included in nep-acc, nep-ent, nep-ino, nep-pbe, nep-pub, nep-sbm and nep-tid
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https://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2022-28.pdf Revised version, 2022 (application/pdf)

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