RIEB Discussion Paper Series No.2022-28

RIEB Discussion Paper Series No.2022-28


Innovation to Keep or to Sell and Tax Incentives


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.


Innovation-based growth; Heterogenous quality improvements; Innovation sales; Corporate tax; Capital gains tax; Market entry subsidy; Product design subsidy

JEL Classification

O31, O33, O43


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