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Increasing Returns, Learning, and Beneficial Tax Competition

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  • SEPPO HONKAPOHJA
  • ARJA TURUNEN‐RED

Abstract

We analyze the welfare impact of entrepreneur mobility in a two‐country overlapping generations model. Increasing returns in production yield multiple equilibria that are stable under adaptive learning. Governments compete for the mobile resource by setting income taxes. We show that large welfare gains can arise from noncooperative taxation. If expectational barriers prevent the realization of high output equilibria, tax competition can sufficiently perturb expectations so that high steady states become attainable. Once in a high production regime, governments may institute cooperative tax increases or reductions so as to bring the economy to the global joint optimum without disturbing the regime.

Suggested Citation

  • Seppo Honkapohja & Arja Turunen‐Red, 2007. "Increasing Returns, Learning, and Beneficial Tax Competition," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(6), pages 927-958, December.
    • Handle: RePEc:bla:jpbect:v:9:y:2007:i:6:p:927-958
    DOI: 10.1111/j.1467-9779.2007.00338.x
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    References listed on IDEAS

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    1. Devereux, Michael P. & Lockwood, Ben & Redoano, Michela, 2008. "Do countries compete over corporate tax rates?," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1210-1235, June.
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    Cited by:

    1. Rainald Borck & Hyun‐Ju Koh & Michael Pflüger, 2012. "Inefficient Lock‐In And Subsidy Competition," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(4), pages 1179-1204, November.

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    More about this item

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • F2 - International Economics - - International Factor Movements and International Business
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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