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Tax Competition for Heterogeneous Firms with Endogenous Entry

  • Ronald B. Davies
  • Carsten Eckel

This paper models tax competition for mobile firms that are differentiated by their productivities. Because taxes affect the distribution of firms, they affect wages, prices, and the number of firms. From the social planner's perspective, optimal taxes efficiently distribute income between private and public consumption and are harmonized, providing the optimal number of firms. This is not a Nash equilibrium. As is common in such models, equilibrium taxes are inefficiently low. Furthermore, there is no pure strategy equilibrium with equal taxes resulting in too many firms. This illustrates a new distortion from tax competition and a new benefit from harmonization. (JEL H21, H25, H87)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/pol.2.1.77
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Article provided by American Economic Association in its journal American Economic Journal: Economic Policy.

Volume (Year): 2 (2010)
Issue (Month): 1 (February)
Pages: 77-102

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Handle: RePEc:aea:aejpol:v:2:y:2010:i:1:p:77-102
Note: DOI: 10.1257/pol.2.1.77
Contact details of provider: Web page: https://www.aeaweb.org/aej-policy
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  7. Ronald B. Davies & Carsten Eckel, 2007. "Tax Competition for Heterogeneous Firms with Endogenous Entry:The Case of Heterogeneous Fixed Costs," The Institute for International Integration Studies Discussion Paper Series iiisdp213, IIIS.
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  24. Andreas Haufler & Ian Wooton, . "Country Size and Tax Competition for Foreign Direct Investment," Working Papers 9702, Business School - Economics, University of Glasgow.
  25. Ronald B. Davies, 2003. "The OECD Model Tax Treaty: Tax Competition And Two-Way Capital Flows," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 725-753, 05.
  26. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
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  28. Clemens Fuest & Bernd Huber & Jack Mintz, 2003. "Capital Mobility and Tax Competition: A Survey," CESifo Working Paper Series 956, CESifo Group Munich.
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