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Redistribution and entrepreneurship with Schumpeterian growth

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Abstract

We examine the effects of redistributive taxation on growth and inequality in a Schumpeterian model with risk-averse agents. There are skilled and unskilled workers, and the growth rate is determined by the occupational choice of skilled agents between entrepreneurship and employment. We show that redistribution provides insurance to entrepreneurs and increases the growth rate. The effects on inequality are such that low tax rates increase inequality relative to laissez-faire due to changes in wages, but higher tax rates can simultaneously raise growth and reduce inequality. We contrast the optimal linear income tax with alternative policies for promoting R&D and find that it is preferable on both equity and efficiency grounds.

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Authors and Affiliations

  1. CNRS and GREQAM, 2 rue de la Charité, 13002, Marseille, France

    Cecilia García-Peñalosa

  2. University of Calgary, Calgary, Canada

    Jean-François Wen

Authors
  1. Cecilia García-Peñalosa
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  2. Jean-François Wen
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Correspondence to Cecilia García-Peñalosa.

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García-Peñalosa, C., Wen, JF. Redistribution and entrepreneurship with Schumpeterian growth. J Econ Growth 13, 57–80 (2008). https://doi.org/10.1007/s10887-008-9027-5

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  • DOI: https://doi.org/10.1007/s10887-008-9027-5

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