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Increasing Returns, Learning, and Beneficial Tax Competition

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Author Info

  • Honkapohja, Seppo

    (University of Cambridge)

  • Turunen-Red, Arja H.

    (University of New Orleans)

Abstract

We analyze the welfare impact of entrepreneur mobility in a two-country model. Increasing returns in production yield multiple equilibria that are stable under adaptive learning. Governments compete for the mobile resource by setting income taxes. We show that large welfare gains can arise from noncooperative taxation. If expectational barriers prevent the realization of high output equilibria, tax competition can sufficiently perturb expectations so that high steady states become attainable. Once in a high production regime, governments may institute cooperative tax increases or reductions so as to bring the economy to the global joint optimum without disturbing the regime.

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Bibliographic Info

Paper provided by University of New Orleans, Department of Economics and Finance in its series Working Papers with number 2005-09.

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Length: 29 pages
Date of creation: Nov 2005
Date of revision:
Handle: RePEc:uno:wpaper:2005-09

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Related research

Keywords: Competition for mobile factors; Overlapping generations; Multiple equilibria; Bifurcations;

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