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Entrepreneurial innovations and taxation

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  • Haufler, Andreas
  • Norbäck, Pehr-Johan
  • Persson, Lars

Abstract

Stimulating entrepreneurship is high on the policy agenda of many countries. We study the effects of tax policies on entrepreneurs' choice of riskiness (or 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. The same distortion does not arise when entrepreneurs sell their innovation in a competitive bidding process to an incumbent before the uncertainty is revealed. 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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 113 (2014)
Issue (Month): C ()
Pages: 13-31

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Handle: RePEc:eee:pubeco:v:113:y:2014:i:c:p:13-31

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Web page: http://www.elsevier.com/locate/inca/505578

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Keywords: Business taxation; Innovation; Loss offset rules; Market entry;

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Cited by:
  1. Andreas Hau fler & Mohammed Mardan, 2013. "Cross-border loss offset can fuel tax competition," Working Papers 1310, Oxford University Centre for Business Taxation.

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