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The Taxation of Bilateral Trade with Endogenous Information

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  • Tri Vi Dang
  • Florian Morath
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    Abstract

    This paper analyzes the effects of taxation on trade in a decentralized market. We show that a tax on profits and a transaction tax have opposite implications for information acquisition and trade in the canonical take-it-and-leave-it offer bargaining model. A (marginal) increase of a transaction tax can lead to more information production and lower the probability of efficient trade. In contrast, a (marginal) increase of a profit tax can reduce the incentive to produce information and increase the probability of efficient trade. The taxation of profits can be efficiency enhancing when information is endogenous, while it has no effect when private information is exogenous.

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    File URL: http://www.tax.mpg.de/RePEc/mpi/wpaper/TAX-MPG-RPS-2013-07.pdf
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    Bibliographic Info

    Paper provided by Max Planck Institute for Tax Law and Public Finance in its series Working Papers with number tax-mpg-rps-2013-07.

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    Length: 41 pages
    Date of creation: Nov 2013
    Date of revision:
    Handle: RePEc:mpi:wpaper:tax-mpg-rps-2013-07

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    Related research

    Keywords: Bargaining; information acquisition; taxation; financial transaction tax; funding markets;

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    References

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    1. Ángel Hernando Veciana, 2006. "Information Acquisition In Auctions: Sealed Bids Vs. Open Bids," Working Papers. Serie AD 2006-10, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
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    3. Kaplow, Louis, 1992. "Income Tax Deductions for Losses as Insurance," American Economic Review, American Economic Association, vol. 82(4), pages 1013-17, September.
    4. Cremer, Jacques & Khalil, Fahad, 1992. "Gathering Information before Signing a Contract," American Economic Review, American Economic Association, vol. 82(3), pages 566-78, June.
    5. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
    6. Francis K. Cheung, 1998. "Excise Tax on a Non-Uniform Pricing Monopoly: Ad Valorem and Unit Taxes Compared," Canadian Journal of Economics, Canadian Economics Association, vol. 31(5), pages 1192-1203, November.
    7. Richard J. Arnott & Joseph E. Stiglitz, 1983. "Moral Hazard and Optimal Commodity Taxation," NBER Working Papers 1154, National Bureau of Economic Research, Inc.
    8. Laszlo Goerke, 2011. "Commodity Tax Structure under Uncertainty in a Perfectly Competitive Market," CESifo Working Paper Series 3339, CESifo Group Munich.
    9. Viral V. Acharya & Lasse H. Pedersen & Thomas Philippon & Matthew Richardson, 2010. "Measuring systemic risk," Working Paper 1002, Federal Reserve Bank of Cleveland.
    10. Nicola Persico, 2000. "Information Acquisition in Auctions," Econometrica, Econometric Society, vol. 68(1), pages 135-148, January.
    11. Stiglitz, J.E., 1989. "Using Tax Policy To Curb Speculative Short-Term Trading," Papers t2, Columbia - Center for Futures Markets.
    12. Sandmo, Agnar, 1985. "The effects of taxation on savings and risk taking," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 5, pages 265-311 Elsevier.
    13. Cremer, J. & Khalil, F. & Rochet, J.-C., 1997. "Strategic information gathering before a contract is offered," Discussion Paper Series In Economics And Econometrics 9708, Economics Division, School of Social Sciences, University of Southampton.
    14. Dang, Tri Vi, 2008. "Bargaining with endogenous information," Journal of Economic Theory, Elsevier, vol. 140(1), pages 339-354, May.
    15. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
    16. Sissel Jensen & Guttorm Schjelderup, 2011. "Indirect taxation and tax incidence under nonlinear pricing," International Tax and Public Finance, Springer, vol. 18(5), pages 519-532, October.
    17. Ginsburgh, Victor & Legros, Patrick & Sahuguet, Nicolas, 2010. "On the incidence of commissions in auction markets," International Journal of Industrial Organization, Elsevier, vol. 28(6), pages 639-644, November.
    18. Ireland, Norman J., 1994. "On limiting the market for status signals," Journal of Public Economics, Elsevier, vol. 53(1), pages 91-110, January.
    19. Viral V. Acharya, 2010. "Measuring systemic risk," Proceedings 1140, Federal Reserve Bank of Chicago.
    20. Thornton Matheson, 2011. "Taxing Financial Transactions," IMF Working Papers 11/54, International Monetary Fund.
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    22. Joseph E. Stiglitz, 1968. "The Effects of Income, Wealth, and Capital Gains Taxation on Risk Taking," Cowles Foundation Discussion Papers 248, Cowles Foundation for Research in Economics, Yale University.
    23. Banerjee, Anindya & Besley, Timothy, 1990. "Moral Hazard, Limited Liability and Taxation: A Principal-Agent Model," Oxford Economic Papers, Oxford University Press, vol. 42(1), pages 46-60, January.
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    26. repec:fip:fedhpr:y:2010:i:may:p:65-71 is not listed on IDEAS
    27. Summers, L.H. & Summers, V.P., 1989. "When Financial Markets Work Too Well : A Cautious Case For A Securities Transactions Tax," Papers t12, Columbia - Center for Futures Markets.
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