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A bargaining model of tax competition

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  • Han, Seungjin
  • Leach, John

Abstract

This paper develops a model in which competing governments offer financial incentives to induce individual firms to locate within their jurisdictions. Equilibrium is described under three specifications of the supplementary taxes. There is no misallocation of capital under two of these specifications, and there might or might not be capital misallocation under the third. This result contrasts strongly with that of the standard tax competition model, which does not allow governments to treat firms individually. That model finds that competition among governments almost always leads to capital misallocation.

Suggested Citation

  • Han, Seungjin & Leach, John, 2008. "A bargaining model of tax competition," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1122-1141, June.
  • Handle: RePEc:eee:pubeco:v:92:y:2008:i:5-6:p:1122-1141
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    References listed on IDEAS

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    1. Ian King & R. Preston McAfee & Linda Welling, 1993. "Industrial Blackmail: Dynamic Tax Competition and Public Investment," Canadian Journal of Economics, Canadian Economics Association, vol. 26(3), pages 590-608, August.
    2. Chris Doyle & Sweder Wijnbergen, 1994. "Taxation of foreign multinationals: A sequential bargaining approach to tax holidays," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 1(3), pages 211-225, October.
    3. Black, Dan A & Hoyt, William H, 1989. "Bidding for Firms," American Economic Review, American Economic Association, vol. 79(5), pages 1249-1256, December.
    4. Burbidge, John & Cuff, Katherine & Leach, John, 2006. "Tax competition with heterogeneous firms," Journal of Public Economics, Elsevier, vol. 90(3), pages 533-549, February.
    5. Koichi Hamada, 1966. "Strategic Aspects of Taxation on Foreign Investment Income," The Quarterly Journal of Economics, Oxford University Press, vol. 80(3), pages 361-375.
    6. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association;National Tax Journal, vol. 52(2), pages 269-304, June.
    7. Bond, Eric W & Samuelson, Larry, 1986. "Tax Holidays as Signals," American Economic Review, American Economic Association, vol. 76(4), pages 820-826, September.
    8. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
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    Citations

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    Cited by:

    1. John Leach, 2008. "Equalization Payments in a Bargaining Model of Tax Competition," Department of Economics Working Papers 2008-01, McMaster University.
    2. Parcero, O.J., 2007. "Inter-jurisdiction subsidy competition for a new production plant: What is the central government optimal policy?," Regional Science and Urban Economics, Elsevier, vol. 37(6), pages 688-702, November.
    3. Bruno De Borger & Wilfried Pauwels, 2010. "A Nash bargaining solution to models of tax and investment competition: tolls and investment in serial transport corridors," Working Papers 2010/1, Institut d'Economia de Barcelona (IEB).
    4. Osiris J. Parcero, 2009. "Optimal country's policy towards multinationals when local regions can choose between firm-specific and non-firm-specific policies," Working Papers 2009/34, Institut d'Economia de Barcelona (IEB).
    5. Nathan M. Jensen Washington University, Rene Lindstadt, Trinity College Dublin, 2009. "Leaning Right and Learning from the Left: Diffusion of Corporate Tax Policy in the OECD," The Institute for International Integration Studies Discussion Paper Series iiisdp290, IIIS.

    More about this item

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H4 - Public Economics - - Publicly Provided Goods

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