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Entrepreneurial Innovations and Taxation

  • Andreas Haufler
  • Pehr-Johan Norbäck
  • Lars Persson

In many countries entrepreneurship is promoted through tax reductions for small businesses and by various government support schemes. We analyze the effects of such policies to subsidize small businesses in a setting where both the risk-return characteristics of the selected innovation project and the mode of commercialization chosen by entrepreneurs (market entry versus sale to an incumbent firm) are endogenous. We show that government programs to support small businesses foster market entry by entrepreneurs but, at the same time, give an incentive to choose low risk projects, due to the existence of limited loss offset provisions. This points to a basic trade-off between the goals of raising competition in technology-intensive markets and the desire of governments to foster risky ‘breakthrough’ innovations.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3473.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3473
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