Financing government spending through lump sum taxes does not distort capital when markets are complete but tends to increase precautionary savings under market incompleteness. Using flat consumption taxes instead leaves precautionary savings unaffected, provided certain conditions on utility...

We show that an outside innovator has a higher incentive to innovate than an incumbent innovator, by auctioning off his patent rights exclusively to an incumbent firm. For significant innovations this is also superior to selling licenses directly.