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Stability and welfare effects of profit taxes within an evolutionary market interaction model

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  • Noemi Schmitt
  • Jan Tuinstra
  • Frank Westerhoff

Abstract

We develop a partial equilibrium model in which firms can locate in two separate regions. A firm's decision where to locate in a given period depends on the regions' relative profitability. If firms react strongly to the regions' relative profitability, their market switching behavior generates unstable dynamics. If the goal of policy makers is to stabilize these dynamics they can do so by introducing profit taxes that reduce the regions' relative profitability. While stability can already be obtained by imposing profit taxes in one of the two regions, total welfare is maximized if policy makers coordinate their tax setting behavior across regions. However, policy makers only interested in welfare in their own region may have the incentive to decrease their profit tax below this level, thereby attracting more firms and increasing tax revenues, at the cost of instability in both regions.

Suggested Citation

  • Noemi Schmitt & Jan Tuinstra & Frank Westerhoff, 2018. "Stability and welfare effects of profit taxes within an evolutionary market interaction model," Review of International Economics, Wiley Blackwell, vol. 26(3), pages 691-708, August.
  • Handle: RePEc:bla:reviec:v:26:y:2018:i:3:p:691-708
    DOI: 10.1111/roie.12319
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    File URL: https://doi.org/10.1111/roie.12319
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    Citations

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    Cited by:

    1. Arata, Yoshiyuki & Mundt, Philipp, 2019. "Topology and formation of production input interlinkages: Evidence from Japanese microdata," BERG Working Paper Series 152, Bamberg University, Bamberg Economic Research Group.
    2. Hommes, Cars & Lustenhouwer, Joep, 2019. "Managing unanchored, heterogeneous expectations and liquidity traps," Journal of Economic Dynamics and Control, Elsevier, vol. 101(C), pages 1-16.
    3. Martin, Carolin & Schmitt, Noemi & Westerhoff, Frank, 2019. "Housing markets, expectation formation and interest rates," BERG Working Paper Series 142, Bamberg University, Bamberg Economic Research Group.
    4. Valentin Marian ANTOHI & Monica Laura ZLATI, 2018. "The impact of profit taxation on the financial solvency of economic agents," Risk in Contemporary Economy, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, pages 43-55.
    5. March, Christoph & Sahm, Marco, 2018. "Contests as selection mechanisms: The impact of risk aversion," Journal of Economic Behavior & Organization, Elsevier, vol. 150(C), pages 114-131.
    6. March, Christoph & Sahm, Marco, 2019. "The perks of being in the smaller team: Incentives in overlapping contests," BERG Working Paper Series 155, Bamberg University, Bamberg Economic Research Group.
    7. Hommes, Cars & Lustenhouwer, Joep & Mavromatis, Kostas, 2018. "Fiscal consolidations and heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 87(C), pages 173-205.
    8. Proaño Acosta, Christian & Lojak, Benjamin, 2019. "Animal spirits, risk premia and monetary policy at the zero lower bound," BERG Working Paper Series 148, Bamberg University, Bamberg Economic Research Group.
    9. Martin Carolin & Westerhoff Frank, 2019. "Regulating Speculative Housing Markets via Public Housing Construction Programs: Insights from a Heterogeneous Agent Model," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 239(4), pages 627-660, August.
    10. Roberto Dieci & Noemi Schmitt & Frank Westerhoff, 2018. "Steady states, stability and bifurcations in multi-asset market models," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 41(2), pages 357-378, November.
    11. Lustenhouwer, Joep & Mavromatis, Kostas, 2017. "Fiscal consolidations and finite planning horizons," BERG Working Paper Series 130, Bamberg University, Bamberg Economic Research Group.
    12. Mundt, Philipp & Oh, Ilfan, 2019. "Asymmetric competition, risk, and return distribution," BERG Working Paper Series 145, Bamberg University, Bamberg Economic Research Group.

    More about this item

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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