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
O31, O33, O43
The Institute for the Liberal Arts, Doshisha University
Research Institute for Economics and Business Administration,
Rokkodai-cho, Nada-ku, Kobe