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Taxation and Incentives to Innovate: A Principal–Agent Approach

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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 patentbox 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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Keywords: INCENTIVES TO INNOVATE; INVENTOR COMPENSATION; PATENT BOX; PROFIT-SHARING SCHEMES; TAX INCENTIVES FOR R&D

Document Type: Research Article

Publication date: 2016-03-01

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  • As one of the world's oldest professional journals in public finance, founded in 1884, FinanzArchiv (FA) publishes original work from all fields of public economics which are of interest to an international readership, e.g. taxation, public debt, public goods, public choice, federalism, market failure, social policy, and the welfare state. Special emphasis is on high-quality theoretical and empirical papers on current policy issues.

    FA is a peer-reviewed journal commited to a prompt turnaround of submissions.

    FA is listed in the Social Science Citation Index (SSCI), in Current Contents/Social and Behavioral Sciences, in Econ Lit, in the Journal of Economic Literature, in IDEAS and RePEc and in the International Bibliography of the Social Sciences.

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