Endogenizing leadership in tax competition: a timing game perspective
AbstractIn this paper we extend the standard approach of horizontal tax competition by endogenizing the timing of decisions made by the competing jurisdictions. Following the literature on the endogenous timing in duopoly games, we consider a pre-play stage, where jurisdictions commit themselves to more early or late, i.e. to fix their tax rate at a first or second stage. We highlight that at least one jurisdiction experiments a second-mover advantage. We show that the Subgame Perfect Equilibria (SPEs) correspond to the two Stackelberg situations yielding to a coordination problem. In order to solve this issue, we consider a quadratic specification of the production function, and we use two criteria of selection: Pareto-dominance and risk-dominance. We emphasize that at the safer equilibrium the less productive or smaller jurisdiction leads and hence loses the second-mover advantage. If asymmetry among jurisdictions is sufficient, Pareto-dominance reinforces risk-domination in selecting the same SPE. Three results may be deduced from our analysis: (i) the downward pressure on tax rates is less severe than predicted; (ii) the smaller jurisdiction leads; (iii) the 'big-country-higher-tax-rate' rule does not always hold. Classification-JEL: H30, H87, C72.
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Bibliographic InfoPaper provided by Banque de France in its series Working papers with number 299.
Length: 34 pages
Date of creation: 2010
Date of revision:
Endogenous timing; tax competition; first/second-mover advantage; strategic complements; stackelberg ; risk dominance.;
Find related papers by JEL classification:
- H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
- H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
This paper has been announced in the following NEP Reports:
- NEP-ACC-2010-11-06 (Accounting & Auditing)
- NEP-ALL-2010-11-06 (All new papers)
- NEP-GTH-2010-11-06 (Game Theory)
- NEP-PBE-2010-11-06 (Public Economics)
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