A Win-Win-Win? Motivating innovation in a knowledge economy with tax incentives

Authored by D d'Andria, I Savin

Date Published: 2018

DOI: 10.1016/j.techfore.2017.05.030

Sponsors: No sponsors listed

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Model Documentation: Other Narrative Flow charts Mathematical description

Model Code URLs: Model code not found

Abstract

In this study we explore effects of two distinct tax policies on innovation in a pure knowledge economy: an `IP box' incentive and a (hypothetical) tax incentive on compensation earned by agents from profit sharing schemes (PSS). In contrast to the conventional assumption that firms decide on whether to innovate or not, we focus on a bottom-up innovation process (sometimes also called `bootleg innovation'), where firms set incentives to fulfill different tasks, but the final decision on whether to make the more innovative task is taken by an employee. We compare the two tax incentives under several distinct specifications demonstrating that the tax incentive on PSS can be a powerful mechanism fostering innovative activity and benefiting at the same time workers, firms and the economy as a whole. This study shows that the more critical for firms is attracting and motivating highly skilled workers, the larger the expected gain from employing the tax incentive on agents' compensation. We also find that the relative efficacy of this tax incentive is moderated by labor mobility and the extent of knowledge spillovers.

Tags

Agent-based models Social networks behavior Dynamics knowledge economy Research-and-development Policies Industries Bottom-up innovation Profit sharing schemes Tax incentives for r \& d Financing of r \& d investments Regression-coefficients Compensation Ownership