@TechReport{dp-387,
  author        = {Grossmann, Volker and Strulik, Holger},
  astring       = {Volker Grossmann and Holger Strulik},
  title         = {Should Continued Family Firms Face Lower Taxes Than Other
                  Estates?},
  month         = {February},
  year          = {2008},
  pages         = {40},
  size          = {281},
  number        = {387},
  language      = {en},
  keywords      = {Bequest Taxation, Creative Destruction, Entrepreneurship,
                  Family Firms, Preferential Tax Treatment.},
  jelclass      = {H25, L26, J24},
  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.}
}