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Firm's Output under Uncertainty and Asymmetric Taxation

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  • Itzhak Zilcha
  • Rafael Eldor

Abstract

We consider competitive firms operating under price uncertainty when taxation is asymmetric (i.e. profits are taxed at a higher rate than losses are compensated). In the absence of risk sharing tools, the larger 'gap' in taxation may either lower or increase the firm's optimal output, depending on whether the relative measure of risk aversion is less than or larger than 1. In the presence of risk sharing markets optimal output does not depend on the tax rates, nor on the price distribution or the firm's attitude towards risk. The firm will engage in hedging and, as a result, will lower its expected taxes. Copyright (c) The London School of Economics and Political Science 2004.

Suggested Citation

  • Itzhak Zilcha & Rafael Eldor, 2004. "Firm's Output under Uncertainty and Asymmetric Taxation," Economica, London School of Economics and Political Science, vol. 71, pages 141-153, February.
  • Handle: RePEc:bla:econom:v:71:y:2004:i::p:141-153
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    Cited by:

    1. Jens Arnold & Cyrille Schwellnus, 2008. "Do Corporate Taxes Reduce Productivity and Investment at the Firm Level? Cross-Country Evidence from the Amadeus Dataset," Working Papers 2008-19, CEPII research center.
    2. Frestad, Dennis, 2010. "Corporate hedging under a resource rent tax regime," Energy Economics, Elsevier, vol. 32(2), pages 458-468, March.

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