Working Paper: CEPR ID: DP9157
Authors: Andreas Haufler; Pehr-Johan Norbäck; Lars Persson
Abstract: Stimulating entrepreneurship is high on the policy agenda of many countries. We study the effects of tax policies on entrepreneurs? choice of riskiness (quality) of an innovation project, and on their mode of commercializing the innovation (market entry versus sale). Limited loss offset provisions in the tax system induce entrepreneurs innovating for entry to choose projects with inefficiently little risk, whereas this imperfection does not arise when innovating for sale. Tax systems which systematically favor market entry of entrepreneurs can thus lead to welfare losses due to inefficient quality choices, despite leading to more competition in the product market.
Keywords: business taxation; innovation; market entry
JEL Codes: H25; L13; M13; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| limited loss offset provisions in the tax system (H20) | entrepreneurs who innovate for market entry choose projects with inefficiently low risk (O35) |
| entrepreneurs who innovate for market entry choose projects with inefficiently low risk (O35) | welfare losses due to inefficient quality choices (L15) |
| tax systems favoring market entry (H20) | welfare losses due to inefficient quality choices (L15) |
| entrepreneurs who innovate for sale (O35) | choice of projects with efficient risk characteristics (G11) |
| policies promoting entrepreneurial market entry (L53) | increase in production and labor demand (J23) |
| policies promoting entrepreneurial market entry (L53) | reduction in consumer surplus and total employment in the industry (F61) |
| a reduction in corporate tax rates (H32) | spur high-risk, high-return innovations (O36) |