Increasing Returns, Learning, and Beneficial Tax Competition
AbstractWe 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 InfoPaper provided by University of New Orleans, Department of Economics and Finance in its series Working Papers with number 2005-09.
Length: 29 pages
Date of creation: Nov 2005
Date of revision:
Competition for mobile factors; Overlapping generations; Multiple equilibria; Bifurcations;
Other versions of this item:
- Seppo Honkapohja & Arja Turunen-Red, 2007. "Increasing Returns, Learning, and Beneficial Tax Competition," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(6), pages 927-958, December.
- H2 - Public Economics - - Taxation, Subsidies, and Revenue
- F2 - International Economics - - International Factor Movements and International Business
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
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