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Taxation and Incentives to Innovate: A Principal-Agent Approach

Listed author(s):
  • Diego d'Andria

A principal-agent model with multiple job tasks is used to explore the effects of different tax schemes on innovation in a pure knowledge economy with bootleg innovation. 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 or a technical or R&D employee) by means of variable pay tied to measures of the company's success. Results point to complementary roles between patent-box tax incentives and reductions in the tax rate levied on profit-sharing schemes, and they show that a revenue-neutral reform substituting the latter for the former is always possible. The complementarity holds, albeit with different relative importance for the two tax incentives, also with nondeductible labor costs and with a stochastic innovation value coupled with a risk-averse agent.

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Article provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.

Volume (Year): 72 (2016)
Issue (Month): 1 (March)
Pages: 96-123

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Handle: RePEc:mhr:finarc:urn:sici:0015-2218(201603)72:1_96:taitia_2.0.tx_2-h
DOI: 10.1628/001522108X14557023949337
Contact details of provider: Web page: https://www.mohr.de/fa

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  1. Holmstrom, Bengt, 1989. "Agency costs and innovation," Journal of Economic Behavior & Organization, Elsevier, vol. 12(3), pages 305-327, December.
  2. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760, July.
  3. Martin Grossmann & Markus Lang & Helmut Dietl, 2011. "Why Taxing Executives' Bonuses Can Foster Risk-Taking Behavior," Working Papers 0150, University of Zurich, Institute for Strategy and Business Economics (ISU), revised May 2012.
  4. Florian Ederer & Gustavo Manso, 2013. "Is Pay for Performance Detrimental to Innovation?," Management Science, INFORMS, vol. 59(7), pages 1496-1513, July.
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  7. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
  8. Doina Radulescu, 2012. "The Effects of a Bonus Tax on Manager Compensation and Welfare," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 68(1), pages 1-16, March.
  9. Thomas Hellmann & Veikko Thiele, 2011. "Incentives and Innovation: A Multitasking Approach," American Economic Journal: Microeconomics, American Economic Association, vol. 3(1), pages 78-128, February.
  10. Francis, Bill & Hasan, Iftekhar & Sharma, Zenu, 2011. "Incentives and innovation : evidence from CEO compensation contracts," Research Discussion Papers 17/2011, Bank of Finland.
  11. Holmström, Bengt, 1989. "Agency Costs and Innovation," Working Paper Series 214, Research Institute of Industrial Economics.
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