Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/27197
Year of Publication: 
2008
Series/Report no.: 
Diskussionsbeitrag No. 387
Publisher: 
Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät, Hannover
Abstract: 
Inheritance taxes may induce heirs to discontinue family firms. Because firm dissolution incurs transaction costs, a preferential tax treatment of transferred family businesses seems to be desirable from a macroeconomic viewpoint. The support of dynastic succession, however, entails also a cost on the economy if firm continuation by less able heirs prevents entry into entrepreneurship. Here, we investigate analytically and quantitatively the trade-off between transaction costs saved and creative destruction prevented. We find that a unique general equilibrium exists at which, depending on the institutional setup, low-ability heirs either abandon (Type 1) or continue (Type 2) a family business. A calibration of the model with German data suggests that preferential tax treatment of family firms has severe negative consequences on macroeconomic performance if it causes a threshold crossing from Type 1 to Type 2 equilibrium. It also reveals that the targeted persons, i.e. the entrepreneurs that are caused to continue a business, always lose relative to their status in an economy without continuation-friendly tax policy.
Subjects: 
Bequest Taxation
Creative Destruction
Entrepreneurship
Family Firms
Preferential Tax Treatment
JEL: 
H25
L26
J24
Document Type: 
Working Paper

Files in This Item:
File
Size
280.62 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.