Working Paper: NBER ID: w13560
Authors: Thomas Philippon
Abstract: I study the allocation of human capital in an economy with production externalities, financial constraints and career choices. Agents choose to become entrepreneurs, workers or financiers. Entrepreneurship has positive externalities, but innovators face borrowing constraints and require the services of financiers in order to invest efficiently. When investment and education subsidies are chosen optimally, I find that the financial sector should be taxed in exactly the same way as the non-financial sector. When direct subsidies to investment and scientific education are not feasible, giving a preferred tax treatment to the financial sector can improve welfare by increasing aggregate investment in research and development.
Keywords: Financial Sector; Taxation; Subsidies; Human Capital; Entrepreneurship
JEL Codes: E21; G18; G20; H23; O41; O43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax policy (H29) | Aggregate investment in research and development (O32) |
| Tax treatment of the financial sector (F38) | Welfare (I38) |
| Binding credit constraints (E51) | Efficiency of human capital allocation (J24) |
| Subsidies to the financial sector (G28) | Aggregate investment (E22) |
| Taxing the financial sector (F38) | Number of entrepreneurs (L26) |
| Optimal taxation structure (H21) | Efficient allocation (D61) |