Entrepreneurial innovations and taxation

Abstract

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.

And the winner is—Acquired. Entrepreneurship as a contest yielding radical innovations

“…The first-order condition for entrant 1, Equation (6), has a parallel with the models by Färnstrand Damsgaard et al (2009) and Haufler et al (2012). In these models, [p(p)]', evaluated at p 1 , needs to be equal to an entry cost, while in our model it needs to equal the expected value of the incumbent's project.…”

Taxation of Knowledge-Based Capital

“…For firms that are not successful, tax credits and deductions may have little or no value. Haufler et al (2011) find that limited loss offset provisions encourage entrepreneurs to undertake less risky projects. Some firms may not be able to recognise the financial statement benefit of tax credits or tax deductions if the tax benefits are not able to be carried forward and utilised in the foreseeable future.…”

Taxation, Innovation and Entrepreneurship

“…8 Haufler et al (2012), for example, take a different viewpoint on optimal tax policies with entrepreneurship. They consider a model where entrepreneurs engage in risky innovation and endogenously choose the quality (riskiness) of their project.…”