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Edited by David B. Audretsch, Isabel Grilo and A. Roy Thurik
* Magnus Henrekson and Jesper Roine Introduction Over the past decades endogenous growth theory has developed models that come closer to making explicit what drives long-term economic development. More speciﬁcally, explicit incentives for innovation have been included so as to explain why individuals would engage in creating new technologies and better ways of producing goods and services (see Barro and Sala-i-Martin, 1995; Aghion and Howitt, 1998). However, the actual agents of change, the entrepreneurs, are still deﬁned rather narrowly and theory does not capture the wide-ranging and complex functions suggested outside mainstream economics (see for example Glancey and McQuaid, 2000; Swedberg, 2000; and Bianchi and Henrekson, 2005). Typically theories of endogenous growth emphasize the (expected) pay-oﬀs from innovation or, more generally, the gains from the activities that improve production and organization. Consequently, taxes and beneﬁts that reduce the incentives for engaging in such activities, or policies that decrease their return, should be expected to reduce growth. It is commonly thought that the welfare state’s large marginal tax wedges reduce incentives to save and accumulate capital, ultimately discouraging innovation. If this is the case, the welfare state should have less innovation and consequently less growth. However, the disincentive eﬀects from taxes could be countered by spending on growth-enhancing activities such as schooling, infrastructure, or well functioning institutions. It is also possible – as was pointed out by Steinmo (1993) and Lindert (2004), among others – that taxes in a welfare state can be raised in ways that are more...
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