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Tax Competition for Heterogeneous Firms with Endogenous Entry

Author Info

  • Ronald B. Davies
  • Carsten Eckel

Abstract

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
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Find related papers by JEL classification:
  • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
  • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
  • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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