Thursday, January 12, 2017
Susan Morse (Texas) presents Entrepreneurship Incentives for Resource-Constrained Firms at Duke today as part of its Tax Policy Workshop Series hosted by Lawrence Zelenak:
How should entrepreneurship and innovation policy account for the fact that different firms have different access to capital? The firms that can more easily claim tax and other legal incentives targeted at encouraging innovation are often large established firms with ready access to capital. But there is no reason to think that large, established firms are best suited to the pursuit of entrepreneurial goals. To the contrary, new firms, such as resource-constrained startups, may have an advantage when it comes to pursuing entrepreneurship and innovation.
The typical resource-constrained firm considered in this chapter is a new, loss-making firm. Legal incentives, including tax incentives, for entrepreneurial action often offer a deal that is unappealing to such a firm. This is because such incentives often require an up-front investment in exchange for a delayed, uncertain payoff. A firm must expend resources to respond to the law. But the legal incentives often do not offer any definite benefit, let alone any immediate benefit, in exchange for the up-front expenditure. ...
This chapter first sets forth how an established firm might decide whether to pursue a certain legal incentive based on whether the project has a positive net present value. It outlines why resource-constrained firms with high discount rates and a high probability of failure are less likely than established firms to pursue legal incentives. Finally, it presents design ideas that can mitigate the problem that different firms have different access to capital and thus different capacity to pursue incentives offered by innovation policy.