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Even Small Trade Costs Restore Efficiency in Tax Competition

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  • Johannes Becker

    ()
    (Institute of Public Economics I, University of Muenster)

  • Marco Runkel

    ()
    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

Abstract

We introduce transport cost of trade in products into the classical Zodrow and Mieszkowski (1986) model of capital tax competition. It turns out that even small levels of transport cost lead to a complete breakdown of the seminal result, the underprovision of public goods. Instead, there is a symmetric equilibrium with efficient public goods provision in all jurisdictions.

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File URL: http://www.fww.ovgu.de/fww_media/femm/femm_2010/2010_23.pdf
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Bibliographic Info

Paper provided by Otto-von-Guericke University Magdeburg, Faculty of Economics and Management in its series FEMM Working Papers with number 100023.

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Length: 9 pages
Date of creation: Oct 2010
Date of revision:
Handle: RePEc:mag:wpaper:100023

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Keywords: Tax Competition; Public Goods Provision; Trade;

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References

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  1. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, Elsevier, vol. 3(2), pages 156-168, June.
  2. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
  3. Mark J. Melitz, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," NBER Working Papers 8881, National Bureau of Economic Research, Inc.
  4. Kai A. Konrad, 2010. "Search Costs and Corporate Income Tax Competition," CESifo Working Paper Series, CESifo Group Munich 3224, CESifo Group Munich.
  5. Davies, Ronald B. & Eckel, Carsten, 2010. "Tax Competition for Heterogeneous Firms with Endogenous Entry," Munich Reprints in Economics, University of Munich, Department of Economics 20021, University of Munich, Department of Economics.
  6. Fuest, Clemens & Huber, Bernd & Mintz, Jack, 2005. "Capital mobility and tax competition," Munich Reprints in Economics, University of Munich, Department of Economics 20329, University of Munich, Department of Economics.
  7. Wilson, John Douglas, 1987. "Trade, Capital Mobility, and Tax Competition," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 95(4), pages 835-56, August.
  8. Wilson, John Douglas & Wildasin, David E., 2004. "Capital tax competition: bane or boon," Journal of Public Economics, Elsevier, Elsevier, vol. 88(6), pages 1065-1091, June.
  9. Haufler, Andreas & Stähler, Frank, 2013. "Tax competition in a simple model with heterogeneous firms: How larger markets reduce profit Taxes," Munich Reprints in Economics, University of Munich, Department of Economics 20412, University of Munich, Department of Economics.
  10. Clemens Fuest & Bernd Huber & Jack Mintz, 2003. "Capital Mobility and Tax Competition: A Survey," CESifo Working Paper Series, CESifo Group Munich 956, CESifo Group Munich.
  11. Black, Dan A & Hoyt, William H, 1989. "Bidding for Firms," American Economic Review, American Economic Association, American Economic Association, vol. 79(5), pages 1249-56, December.
  12. Laussel, Didier & Le Breton, Michel, 1998. "Existence of Nash equilibria in fiscal competition models," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 28(3), pages 283-296, May.
  13. Zodrow, George R. & Mieszkowski, Peter, 1986. "Pigou, Tiebout, property taxation, and the underprovision of local public goods," Journal of Urban Economics, Elsevier, vol. 19(3), pages 356-370, May.
  14. Bayindir-Upmann, Thorsten & Ziad, Abderrahmanne, 2005. "Existence of equilibria in a basic tax-competition model," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 35(1), pages 1-22, January.
  15. Hoyt, William H., 1991. "Property taxation, Nash equilibrium, and market power," Journal of Urban Economics, Elsevier, vol. 30(1), pages 123-131, July.
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Cited by:
  1. Pauser, Johannes, 2013. "Capital mobility, imperfect labour markets, and the provision of public goods," IAB Discussion Paper, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany] 201309, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].

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