Redistribution and occupational choice in a Schumpeterian growth model

We consider an R&D-driven endogenous growth model in which innovation is risky and agents are risk averse. Growth is determined by the occupational choice of agents who can either work in production for a wage or become entrepreneurs. In this context, we examine the impact of redistributive taxation and compute socially optimal tax rates. Redistribution acts as social insurance, thus encouraging innovation and accelerating growth. The general equilibrium effects of the reallocation of labour induced by taxation can offset the direct distributive impact of taxes and result in a Pareto improvement. Optimal tax rates are a humpshaped function of the intertemporal spillover effect.