Institutions and incentives to innovate: Economic Growth and Optimal Regulation
Topic: Institutions and incentives to innovate: Economic Growth and Optimal Regulation
Time: Tuesday , 2012-06-05 12:00-08:00
Venue:
Speaker: ,
Affiliations: New York University
Topic:
Institutions and incentives to innovate: Economic Growth and Optimal Regulation
Time:
星期四,2012-06-05 10:30-12:00
Venue:
Room 505, Datong Building West Huaihai Road 211, SAIF
Speaker:
Kose John

Institutions and incentives to innovate: Economic Growth and Optimal Regulation

How do institutions in place affect the incentives to innovate and take risk? The global financial crisis has generated extensive debate on the reforms of financial regulation around the world. How restrictive should regulation be? In a broader context in which innovation in the private sector imposes positive and negative externalities, the social impact of private firms and financial institutions depends on the sharing rule between their owners and the society at large. This sharing rule is governed by laws, regulations, and institutions in place. We propose a framework where the social planner puts in place a system of laws, organizational forms, and taxation within which firms optimize without invasive regulations. Since the legal regime affects the extent to which the owners of firms are held responsible for the negative externalities they impose, unlimited liability may discourage innovation in strong legal regimes. Limited liability, however, might be accompanied by excessive innovation. In this framework we consider an optimally designed structure of taxation, a menu of organizational forms, and the legal system. In this structure, firms choose their organizational forms and level of innovation consistent with private optimality, and we show that these private choices are aligned with social optimality. One implication of such equilibrium is that the corporate tax rates are a decreasing function of legal effectiveness in the embedding economy. Finally, we explore the policy implications of our results for emerging and transition economies, e.g., the effectiveness of the mechanisms used in the bailout of distressed institutions and the pace of economic growth.

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