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Taxation and incentives to innovate: a principal-agent approach

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  • Diego d'Andria

    (Friedrich Schiller University of Jena, DFG Research Training Group "The Economics of Innovative Change")

Abstract

A principal-agent multitasking model is used to explore the effects of different tax schemes on innovation in a pure knowledge economy. Corporate taxes and labor income taxes can affect both the firm owner's and the employee's incentives to commit to innovative tasks, when the former compensates the latter (a manager, technical or R&D employee) by means of variable pay tied to measures of the company's success. Results point to a complementary role between "patent box" tax incentives and reductions in the tax rate levied on profit sharing schemes. This complementarity holds, albeit with different relative importance for the two tax incentives, also with non-deductible labor costs, with a stochastic innovation value coupled with a risk-averse agent, and with multiple principals competing for talented agents.

Suggested Citation

  • Diego d'Andria, 2014. "Taxation and incentives to innovate: a principal-agent approach," Jena Economics Research Papers 2014-028, Friedrich-Schiller-University Jena.
    • Handle: RePEc:jrp:jrpwrp:2014-028
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    tax incentives for R&D; patent box; principal-agent models; multitasking models; profit sharing schemes; incentives to innovate;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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