RIEB Discussion Paper Series No.2022-28

Title

Innovation to Keep or to Sell and Tax Incentives

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

JEL Classification

O31, O33, O43

Inquiries

Colin DAVIS
The Institute for the Liberal Arts, Doshisha University

Laixun ZHAO
Research Institute for Economics and Business Administration,
Kobe University
Rokkodai-cho, Nada-ku, Kobe
657-8501 Japan
Phone: +81-78-803-7036
FAX: +81-78-803-7059