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And the Tax Winner Is... Endogenous Timing in the Commodity Taxation Race

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  • Hubert Kempf
  • Grégoire Rota-Graziosi

Abstract

We investigate the endogenous choice of leadership in commodity tax competition. We apply an endogenous timing game, where jurisdictions commit themselves to lead or to follow, to the Kanbur and Keen (1993) model. The Subgame Perfect Nash Equilibria (SPNE) correspond to the two Stackelberg situations, yielding to a coordination issue. Selecting an equilibrium by means of the risk-dominance criterion, we prove that the smaller country has to lead. When countries sufficiently differ in size, both countries set the same tax rate at the risk dominant equilibrium; when they are close in size, the larger country exploits its second-mover advantage by setting a lower tax rate than the small one. In either case, the "bigger-country-higher-tax-rate" rule does not hold anymore.

Suggested Citation

  • Hubert Kempf & Grégoire Rota-Graziosi, 2014. "And the Tax Winner Is... Endogenous Timing in the Commodity Taxation Race," Annals of Economics and Statistics, GENES, issue 113-114, pages 67-79.
  • Handle: RePEc:adr:anecst:y:2014:i:113-114:p:67-79
    DOI: 10.15609/annaeconstat2009.113-114.67
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