Should Continued Family FirmsFace Lower Taxes Than Other Estates?

Taxes on inheritances may induce heirs to discontinue family firms. Becausefirm dissolution incurs transaction costs, a preferential tax treatment of transferredfamily businesses seems to be desirable from a macroeconomic viewpoint.The support of dynastic succession, however, entails also a cost on the economy iffirm continuation by less able heirs prevents entry into entrepreneurship. Here, weinvestigate analytically and quantitatively the trade-off between transaction costssaved and creative destruction prevented. We find that a unique general equilibriumexists at which, depending on the institutional setup, low-ability heirs eitherabandon (Type 1) or continue (Type 2) a family business.[...]