Entrepreneurship Incentives for Resource-Constrained Firms

Abstract

Government should not always try to encourage innovation and entrepreneurship by offering incentives. But when it does, it should consider the fact that these incentives are often less attractive to resource-constrained firms, like startups, even though startups are promising sources of innovation. Traditional tax incentives, for instance, offer larger, earlier benefits to profitable, established firms.

Legal incentives can be made more accessible to startups and other resource-constrained firms. Policies can reduce or delay transaction costs. They can offer ex ante benefits through mechanisms like refundable tax credits or full loss offsets, so that startups and established firms benefit more equally. Policies can also allow firms to monetize legal benefits or finance investment in legal benefits by transferring them to investors.

Policy that seeks to incentivize entrepreneurship or innovation should account for the diversity of firms that might take advantage of legal incentives. It should not assume that firms are profitable. Rather, entrepreneurial incentives should accommodate the important case of resource-constrained, loss-making firms.

Keywords: entrepreneurship, innovation, legal incentives, tax incentives, losses

JEL Classification: H20, H25, K22, H40