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Hotelling Tax Competition

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  • Myrna Wooders
  • Ben Zissimos

Abstract

This paper shows how competition among governments for mobile firms can bring about excessive differentiation in levels of taxation and public good provision. Hotelling’s Principle of Minimum Differentiation is applied in the context of tax competition and shown to be invalid. Instead, when an equilibrium exists, differentiation of public good provision is maximized. Non-existence of equilibrium, which is possible, is a metaphor for intense tax competition. The paper also shows that, to some extent, perfect tax discrimination presents a solution to the existence problem created by Hotelling tax competition, but that the efficiency problem of Hotelling tax competition is exacerbated.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 932.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_932

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Keywords: hotelling; limit tax; perfect tax discrimination; tax competion;

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References

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  26. Milgrom, Paul & Roberts, John, 1982. "Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis," Econometrica, Econometric Society, Econometric Society, vol. 50(2), pages 443-59, March.
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  30. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
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Citations

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Cited by:
  1. C. Dembour, 2008. "Competition for Business Location: A Survey," Journal of Industry, Competition and Trade, Springer, Springer, vol. 8(2), pages 89-111, June.
  2. John Burbidge & Katherine Cuff & John Leach, 2004. "Capital Tax Competition with Heterogeneous Firms and Agglomeration Effects (new title: Tax competition with heterogeneous firms)," CESifo Working Paper Series 1277, CESifo Group Munich.
  3. Hiroshi Aiura & Yasuo Sanjo, 2010. "Privatization of local public hospitals: effect on budget, medical service quality, and social welfare," International Journal of Health Care Finance and Economics, Springer, Springer, vol. 10(3), pages 275-299, September.
  4. DEMBOUR, Carole & WAUTHY, Xavier, . "Investment in public infrastructure with spillovers and tax competition between contiguous regions," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -2161, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Redoano, Michela, 2003. "Fiscal Interactions Among European Countries," The Warwick Economics Research Paper Series (TWERPS), University of Warwick, Department of Economics 680, University of Warwick, Department of Economics.

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