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Taxation and Incomplete Contracts

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  • Simone Moriconi

    ()
    (DISCE,Università Cattolica)

Abstract

This paper analyzes the impact of taxation on economic efficiency when contracts are incomplete, firms operate in a perfect competitive market and can choose between integrated or non-integrated governance to cope with contract incompleteness. Taxation reduces incentives to pursue intra-firm coordination, thus the efficiency of firm's production process under non-integration. This is not the case under integration, since production decisions are transferred to the Headquarters, at a fixed integration cost. Taxation may then induce firms to change their organization at the industry equilibrium. We show that a tax that induces firms to choose integration rather than non-integration may serve a corrective function if integration costs and market prices are not too high.

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Bibliographic Info

Paper provided by Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE) in its series DISCE - Quaderni dell'Istituto di Teoria Economica e Metodi Quantitativi with number itemq1263.

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Length: 32 pages
Date of creation: Jul 2012
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Handle: RePEc:ctc:serie6:itemq1263

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Web page: http://www.unicatt.it/Istituti/TeoriaEconomica
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Keywords: taxation; incomplete contracts; economic efficiency;

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  1. Oliver Hart & John Moore, 2005. "On the Design of Hierarchies: Coordination versus Specialization," Journal of Political Economy, University of Chicago Press, vol. 113(4), pages 675-702, August.
  2. Paola Conconi & Patrick Legros & Andrew Newman, 2012. "Trade Liberalization and Organizational Change," ULB Institutional Repository 2013/145500, ULB -- Universite Libre de Bruxelles.
  3. Oliver Hart & John Moore, 2007. "Contracts as Reference Points," ESE Discussion Papers 170, Edinburgh School of Economics, University of Edinburgh.
  4. Bertrand, Marianne & Mullainathan, Sendhil, 2003. "Enjoying the Quiet Life? Corporate Governance and Managerial Preferences," Scholarly Articles 3429713, Harvard University Department of Economics.
  5. Ernst Fehr & Oliver Hart & Christian Zehnder, 2011. "Contracts as Reference Points--Experimental Evidence," American Economic Review, American Economic Association, vol. 101(2), pages 493-525, April.
  6. Anderson, Simon P. & de Palma, Andre & Kreider, Brent, 2001. "The efficiency of indirect taxes under imperfect competition," Journal of Public Economics, Elsevier, vol. 81(2), pages 231-251, August.
  7. Macher Jeffrey T & Richman Barak D, 2008. "Transaction Cost Economics: An Assessment of Empirical Research in the Social Sciences," Business and Politics, De Gruyter, vol. 10(1), pages 1-65, May.
  8. Oliver Hart & Bengt Holmstrom, 2008. "A Theory of Firm Scope," NBER Working Papers 14613, National Bureau of Economic Research, Inc.
  9. Oliver E. Williamson, 2010. "Transaction Cost Economics: The Natural Progression," American Economic Review, American Economic Association, vol. 100(3), pages 673-90, June.
  10. D, Acemoglu & Philippe Aghion & Claire Lelarge & John Van Reenen & Fabrizzio Zilibotti, 2006. "Technology, Information and the Decentralization of the Firm," Working Papers 2006-12, Centre de Recherche en Economie et Statistique.
  11. Legros, Patrick & Newman, Andrew, 2009. "A Price Theory of Vertical and Lateral Integration," CEPR Discussion Papers 7211, C.E.P.R. Discussion Papers.
  12. Coase, Ronald H., 1990. "Accounting and the theory of the firm," Journal of Accounting and Economics, Elsevier, vol. 12(1-3), pages 3-13, January.
  13. Williamson, Oliver E, 1971. "The Vertical Integration of Production: Market Failure Considerations," American Economic Review, American Economic Association, vol. 61(2), pages 112-23, May.
  14. Kay, J. A. & Keen, M. J., 1983. "How should commodities be taxed? : Market structure, product heterogeneity and the optimal structure of commodity taxes," European Economic Review, Elsevier, vol. 23(3), pages 339-358, September.
  15. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760, December.
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