Joseph Bankman

Why Start-Ups?

The prototypical start up involves an employee leaving her job with an idea, and selling a portion of that idea to a venture capitalist. Yet the idea should be worth more to the former employer. In this setting, the former employer can be expected to have better information concerning the employee-entrepreneur and the technology, have opportunities to capture economies of scale and scope not available to a venture capital-backed start-up, and will receive more favorable tax treatment than the start-up should the innovation fail. In connection with an auction of the idea, the former employer should have both a more accurate estimate of its value and receive an element of private value not available to the venture capitalist. In turn, this should give rise to a powerful winners curse: each time a venture capitalist wins the auction, it will have paid more than a party that has better information and receives an element of private value, in contrast to the venture capitalists receipt of only common value. The puzzle, then is why we ever observe start-ups? Our analysis of the former-employers bidding strategy stresses the impact on the employers ongoing research effort of purchasing a share in the employees idea for a price comparable to what a venture capitalist would pay. Where research is a team effort, an employers bidding creates an incentive for employees to establish internal property rights to their research efforts. Such influence activities reduce the future output of the employers R&D efforts. Thus, in setting the internal incentives of its research employees -- in effect, the employers internal bid for the discovery -- an employer must trade off the between the strength of the incentives and the impact on the overall research effort of high individual payoffs to innovation. The employer sets the internal payoff to discovery to equalize the marginal benefit of an additional unit of incentive (a higher bid) and the marginal cost of the resulting decrease in the effectiveness of its research effort. Some employees are therefore allowed to leave, and start-ups are observed.

Consumption Taxation Is Still Superior to Income Taxation

This essay responds to an article by Daniel Shaviro which argues in part that the failure of empirical assumptions behind the permanent income hypothesis undermines the case for preferring consumption taxation over income taxation. We consider each of Shaviros arguments and conclude that none change the basic considerations in favor of consumption taxation in any significant way. Shaviro concludes that administrability and implementation concerns should be central to the choice of the tax base and that these concerns are likely to point to taxing consumption. We agree with this conclusion.

Social Welfare and the Rate Structure: A New Look at Progressive Taxation

The progressive rate structure of the federal income tax has always been controversial. In this Article, Professors Bankman and Griffith explore the moral underpinnings and economic effects of the progressive income tax. Observing that all rate structures must be premised upon, and measured by, a theory of distributive justice, they first consider possible normative bases for a tax structure. They select as the normative basis for their analysis welfarist theories of distributive justice, which judge the tax structure on the basis of its effect on societal welfare. They next reexamine the traditional economic arguments against progressive taxation. They critically analyze both the labor-related efficiency costs ofprogressive taxation and the traditional arguments that progressivity imposes significant administrative costs, promotes the misallocation of capital, and increases tax evasion. Finally, they describe an optimal tax model for calculating the most desirable tax rate, balancing the costs ofprogressivity against possible gains from redistribution. The model proposed by Bankman and Griffith produces two results of particular importance. First, under most welfarist theories, the optimal tax rate is progressive, but not confiscatory. Second, a progressive tax is best implemented not by graduated or rising marginal