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Taxation and Incomplete Contracts

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  • Simone Moriconi

    ()
    (ITEMQ, Università Cattolica di Milano and CREA, University of Luxembourg)

Abstract

This paper analyzes the impact of taxation on economic effciency when contracts are incomplete. We assume 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 effciency 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 Center for Research in Economic Analysis, University of Luxembourg in its series CREA Discussion Paper Series with number 12-08.

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Date of creation: 2012
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Handle: RePEc:luc:wpaper:12-08

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Keywords: taxation; incomplete contracts and economic effciency;

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  1. Oliver Hart & Bengt Holmstrom, 2008. "A Theory of Firm Scope," NBER Working Papers 14613, National Bureau of Economic Research, Inc.
  2. Patrick Legros & Andrew F. Newman, 2013. "A Price Theory of Vertical and Lateral Integration," The Quarterly Journal of Economics, Oxford University Press, vol. 128(2), pages 725-770.
  3. Simon P. Anderson & Andre de Palma & Brent Kreider, 2000. "The Efficiency of Indirect Taxes under Imperfect Competition," Virginia Economics Online Papers 342, University of Virginia, Department of Economics.
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  9. 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.
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  11. Daron Acemoglu & Philippe Aghion & Claire Lelarge & John Van Reenen & Fabrizio Zilibotti, 2007. "Technology, Information, and the Decentralization of the Firm," The Quarterly Journal of Economics, MIT Press, vol. 122(4), pages 1759-1799, November.
  12. 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.
  13. Oliver E. Williamson, 2010. "Transaction Cost Economics: The Natural Progression," American Economic Review, American Economic Association, vol. 100(3), pages 673-90, June.
  14. 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.
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