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Stability of Coalitional Equilibria within Repeated Tax Competition

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  • Sonja Brangewitz

    ()
    (Institute of Mathematical Economics, Bielefeld University)

  • Sarah Brockhoff

    (Department of Business Administration and Economics, Bielefeld University)

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    Abstract

    This paper analyzes the stability of capital tax harmonization agreements in a stylized model where countries have formed coalitions which set a common tax rate in order to avoid the inefficient fully non-cooperative Nash equilibrium. In particular, for a given coalition structure we study to what extend the stability of tax agreements is affected by the coalitions that have formed. In our set-up, countries are symmetric, but coalitions can be of arbitrary size. We analyze stability by means of a repeated game setting employing simple trigger strategies and we allow a sub-coalition to deviate from the coalitional equilibrium. For a given form of punishment we are able to rank the stability of different coalition structures as long as the size of the largest coalition does not change. Our main results are: (1) singleton regions have the largest incentives to deviate, (2) the stability of cooperation depends on the degree of cooperative behavior ex-ante.

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    File URL: http://www.imw.uni-bielefeld.de/papers/files/imw-wp-461.pdf
    File Function: First version, 2012
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    Bibliographic Info

    Paper provided by Bielefeld University, Center for Mathematical Economics in its series Working Papers with number 461.

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    Length: 47 pages
    Date of creation: Feb 2012
    Date of revision:
    Handle: RePEc:bie:wpaper:461

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    Related research

    Keywords: capital tax competition; tax coordination; coalitional equilibria; repeated game;

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