IDEAS home Printed from
MyIDEAS: Login to save this article or follow this journal

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)

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

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

in new window

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:

More information through EDIRC

Order Information: Web:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Devereux, Michael P & Lockwood, Ben & Redoano, Michela, 2002. "Do Countries Compete Over Corporate Tax Rates?," The Warwick Economics Research Paper Series (TWERPS) 642, University of Warwick, Department of Economics.
  2. 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.
  3. Ronald B. Davies & Carsten Eckel, 2007. "Tax Competition for Heterogeneous Firms with Endogenous Entry: The Case of Heterogeneous Fixed Costs," University of Oregon Economics Department Working Papers 2007-7, University of Oregon Economics Department.
  4. Davies, Ronald B., 2005. "State tax competition for foreign direct investment: a winnable war?," Journal of International Economics, Elsevier, vol. 67(2), pages 498-512, December.
  5. Richard Baldwin; Paul Krugman, 2001. "Agglomeration, Integration and Tax Harmonization," IHEID Working Papers 01-2001, Economics Section, The Graduate Institute of International Studies.
  6. Gordon H. Hanson & Raymond J. Mataloni & Matthew J. Slaughter, 2003. "Vertical Production Networks in Multinational Firms," NBER Working Papers 9723, National Bureau of Economic Research, Inc.
  7. Haufler, Andreas & Wooton, Ian, 2006. "The effects of regional tax and subsidy coordination on foreign direct investment," Munich Reprints in Economics 19926, University of Munich, Department of Economics.
  8. Fabio Ghironi & Marc J. Melitz, 2004. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," Boston College Working Papers in Economics 599, Boston College Department of Economics.
  9. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
  10. Bond, Eric W & Samuelson, Larry, 1989. "Strategic Behaviour and the Rules for International Taxation of Capital," Economic Journal, Royal Economic Society, vol. 99(398), pages 1099-1111, December.
  11. Itoh, Motoshige & Kiyono, Kazuharu, 1987. "Welfare-Enhancing Export Subsidies," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 115-37, February.
  12. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
  13. Eckard Janeba, . "Tax Competition in Imperfectly Competitive Markets," Discussion Paper Serie A 513, University of Bonn, Germany.
  14. Haufler, Andreas & Wooton, Ian, 1999. "Country size and tax competition for foreign direct investment," Journal of Public Economics, Elsevier, vol. 71(1), pages 121-139, January.
  15. Janeba, Eckhard, 1995. "Corporate income tax competition, double taxation treaties, and foreign direct investment," Journal of Public Economics, Elsevier, vol. 56(2), pages 311-325, February.
  16. Bjorvatn, Kjetil & Eckel, Carsten, 2006. "Policy competition for foreign direct investment between asymmetric countries," Munich Reprints in Economics 20270, University of Munich, Department of Economics.
  17. Raff, Horst, 2004. "Preferential trade agreements and tax competition for foreign direct investment," Journal of Public Economics, Elsevier, vol. 88(12), pages 2745-2763, December.
  18. Thomas A. Gresik, 2001. "The Taxing Task of Taxing Transnationals," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 800-838, September.
  19. Black, Dan A & Hoyt, William H, 1989. "Bidding for Firms," American Economic Review, American Economic Association, vol. 79(5), pages 1249-56, December.
  20. Edwards, Jeremy & Keen, Michael, 1996. "Tax competition and Leviathan," European Economic Review, Elsevier, vol. 40(1), pages 113-134, January.
  21. Markusen, James R., 1984. "Multinationals, multi-plant economies, and the gains from trade," Journal of International Economics, Elsevier, vol. 16(3-4), pages 205-226, May.
  22. Ferrett, Ben & Wooton, Ian, 2005. "Competing for a Duopoly: International Trade and Tax Competition," CEPR Discussion Papers 5379, C.E.P.R. Discussion Papers.
  23. Roger H. Gordon, 1990. "Can Capital Income Taxes Survive in Open Economies?," NBER Working Papers 3416, National Bureau of Economic Research, Inc.
  24. Clemens Fuest & Bernd Huber & Jack Mintz, 2003. "Capital Mobility and Tax Competition: A Survey," CESifo Working Paper Series 956, CESifo Group Munich.
  25. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 451-71, June.
  26. Ronald B. Davies & Christopher J. Ellis, 2001. "Competition in Taxes and Performance Requirements for Foreign Direct Investment," University of Oregon Economics Department Working Papers 2001-4, University of Oregon Economics Department, revised 01 Jun 2001.
  27. Braconier, Henrik & Norb├Ąck, Pehr-Johan & Urban, Dieter, 2002. "Vertical FDI Revisited," Working Paper Series 579, Research Institute of Industrial Economics.
  28. Susan E. Feinberg & Michael P. Keane, 2001. "U.S.-Canada Trade Liberalization And Mnc Production Location," The Review of Economics and Statistics, MIT Press, vol. 83(1), pages 118-132, February.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:aea:aejpol:v:2:y:2010:i:1:p:77-102. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jane Voros)

or (Michael P. Albert)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.