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Innovation to Keep or to Sell and Tax Incentives

Author

Listed:
  • Colin Davis

    (The Institute for the Liberal Arts, Doshisha University, JAPAN)

  • Laixun Zhao

    (Research Institute for Economics & Business Administration (RIEB), Kobe University, JAPAN)

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.

Suggested Citation

  • Colin Davis & Laixun Zhao, 2022. "Innovation to Keep or to Sell and Tax Incentives," Discussion Paper Series DP2022-28, Research Institute for Economics & Business Administration, Kobe University, revised Nov 2022.
    • Handle: RePEc:kob:dpaper:dp2022-28
    as

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    File URL: https://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2022-28.pdf
    File Function: Revised version, 2022
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    References listed on IDEAS

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    More about this item

    Keywords

    Innovation based growth; Heterogenous quality improvements; Innovation sales; Corporate tax; Capital gains tax; Market entry subsidy; Product design subsidy;
    All these keywords.

    JEL classification:

    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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