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Cross-border casino competition, Externalities and Optimal Tax Policy: A Unified Theory with Quantitative Analysis

Author

Listed:
  • Chang, Juin-Jen
  • Fiedler, Ingo
  • Lai, Ching-Chong
  • Wang, Ping

Abstract

We develop a framework on cross-border competition in markets for goods with negative externalities and provide evidence for optimal fiscal policy with a special focus on taxation. We build the case of two bordering casinos with city governments setting taxes to maximize social welfare. Analytically, we show that cross-border casino gambling makes aggregate casino demand more elastic. By calibrating the model to fit the Detroit-Windsor market, our welfare analysis shows that cross-border competition induces both cities to lower casino taxes, while the optimal tax mix features a shift from the casino revenue tax to the good and service surcharge on gambling in Detroit but a reversed shift in Windsor. We also find a casino buy-out deal to not be credible because Windsor's willingness to pay Detroit to ban Michigan casinos is far below Detroit's willingness to accept giving up its casinos.

Suggested Citation

  • Chang, Juin-Jen & Fiedler, Ingo & Lai, Ching-Chong & Wang, Ping, 2021. "Cross-border casino competition, Externalities and Optimal Tax Policy: A Unified Theory with Quantitative Analysis," Regional Science and Urban Economics, Elsevier, vol. 88(C).
    • Handle: RePEc:eee:regeco:v:88:y:2021:i:c:s0166046221000132
    DOI: 10.1016/j.regsciurbeco.2021.103653
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    References listed on IDEAS

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    More about this item

    Keywords

    Cross-border casino competition; Gambling externalities; Optimal tax policy;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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