Taxing transitions: Inheritance tax and family firm succession

In many OECD countries, family firms face lower or no succession taxes if they fulfill continuation requirements. We study the effects of such preferential treatment in a two-generation model. Preferential treatment of continued firms leads to more entrepreneurship and higher wages, as entrepreneurs invest more as they value passing on a larger firm. However, more low-ability heirs continue the firm, leading to efficiency losses. In the presence of financial frictions, richer (but less able) heirs may invest more than buyers from outside.