IDEAS home Printed from https://ideas.repec.org/a/eee/regeco/v43y2013i4p570-578.html
   My bibliography  Save this article

Endogenizing governments' objectives in tax competition

Author

Listed:
  • Pal, Rupayan
  • Sharma, Ajay

Abstract

In this paper we endogenize objective functions of the regions in case the of tax competition for foreign owned mobile capital. First, considering symmetric regions and simultaneous move tax competition, we demonstrate that the competing regions can restrict ‘race-to-the-bottom’ in tax rates by deviating away from social welfare to net tax revenue. Moreover, it is optimal for a region to be fully revenue oriented even if that region's ultimate goal is to maximize social welfare, irrespective of whether the rival region is concerned about social welfare or net tax revenue. Next, we show that these results go through under production asymmetry and under sequential/simultaneous choice of public investment and tax rate in the case of two-dimensional competition. However, in the case of Stackelberg type competition, it is optimal for the leader region not to deviate from its ultimate goal, while the follower region always gains from being fully revenue oriented.

Suggested Citation

  • Pal, Rupayan & Sharma, Ajay, 2013. "Endogenizing governments' objectives in tax competition," Regional Science and Urban Economics, Elsevier, vol. 43(4), pages 570-578.
    • Handle: RePEc:eee:regeco:v:43:y:2013:i:4:p:570-578
    DOI: 10.1016/j.regsciurbeco.2013.04.004
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0166046213000422
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.regsciurbeco.2013.04.004?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Hindriks, Jean & Peralta, Susana & Weber, Shlomo, 2008. "Competing in taxes and investment under fiscal equalization," Journal of Public Economics, Elsevier, vol. 92(12), pages 2392-2402, December.
    2. Thomas McGuire, 1981. "Budget-maximizing governmental agencies: An empirical test," Public Choice, Springer, vol. 36(2), pages 313-322, January.
    3. Edwards, Jeremy & Keen, Michael, 1996. "Tax competition and Leviathan," European Economic Review, Elsevier, vol. 40(1), pages 113-134, January.
    4. Bryan Caplan, 2001. "Has Leviathan Been Bound? A Theory of Imperfectly Constrained Government with Evidence from the States," Southern Economic Journal, John Wiley & Sons, vol. 67(4), pages 825-847, April.
    5. Nelson, Michael A, 1987. "Searching for Leviathan: Comment and Extension," American Economic Review, American Economic Association, vol. 77(1), pages 198-204, March.
    6. Laussel, Didier & Le Breton, Michel, 1998. "Existence of Nash equilibria in fiscal competition models," Regional Science and Urban Economics, Elsevier, vol. 28(3), pages 283-296, May.
    7. Zissimos, Ben & Wooders, Myrna, 2008. "Public good differentiation and the intensity of tax competition," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1105-1121, June.
    8. Kempf, Hubert & Rota-Graziosi, Grégoire, 2010. "Endogenizing leadership in tax competition," Journal of Public Economics, Elsevier, vol. 94(9-10), pages 768-776, October.
    9. Pieretti, Patrice & Zanaj, Skerdilajda, 2011. "On tax competition, public goods provision and jurisdictions' size," Journal of International Economics, Elsevier, vol. 84(1), pages 124-130, May.
    10. Oates, Wallace E, 1985. "Searching for Leviathan: An Empirical Study," American Economic Review, American Economic Association, vol. 75(4), pages 748-757, September.
    11. Wilson, John Douglas, 2005. "Welfare-improving competition for mobile capital," Journal of Urban Economics, Elsevier, vol. 57(1), pages 1-18, January.
    12. Torsten Persson & Guido Tabellini, 1992. "The Politics of 1992: Fiscal Policy and European Integration," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(4), pages 689-701.
    13. Marceau, Nicolas & Mongrain, Steeve & Wilson, John D., 2010. "Why do most countries set high tax rates on capital?," Journal of International Economics, Elsevier, vol. 80(2), pages 249-259, March.
    14. Hubert Kempf & Grégoire Rota-Graziosi, 2010. "Endogenizing leadership in the tax competition race," Documents de travail du Centre d'Economie de la Sorbonne 10039, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    15. Zax, Jeffrey S, 1989. "Is There a Leviathan in Your Neighborhood?," American Economic Review, American Economic Association, vol. 79(3), pages 560-567, June.
    16. Hoyt, William H., 1991. "Property taxation, Nash equilibrium, and market power," Journal of Urban Economics, Elsevier, vol. 30(1), pages 123-131, July.
    17. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, vol. 95(380a), pages 138-147, Supplemen.
    18. Christos Kotsogiannis & Konstantinos Serfes, 2010. "Public Goods and Tax Competition in a Two‐Sided Market," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 12(2), pages 281-321, April.
    19. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-940, December.
    20. Clemens Fuest & Bernd Huber, 2001. "Tax Competition and Tax Coordination in a Median Voter Model," Public Choice, Springer, vol. 107(1), pages 97-113, April.
    21. Steven D. Sklivas, 1987. "The Strategic Choice of Managerial Incentives," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 452-458, Autumn.
    22. Ihori, Toshihiro & Yang, C.C., 2009. "Interregional tax competition and intraregional political competition: The optimal provision of public goods under representative democracy," Journal of Urban Economics, Elsevier, vol. 66(3), pages 210-217, November.
    23. Carlo Perroni & Kimberley A. Scharf, 2001. "Tiebout with Politics: Capital Tax Competition and Constitutional Choices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 68(1), pages 133-154.
    24. Torsten Persson, 1992. "Politics and economic policy," Discussion Paper / Institute for Empirical Macroeconomics 62, Federal Reserve Bank of Minneapolis.
    25. Kanbur, Ravi & Keen, Michael, 1993. "Jeux Sans Frontieres: Tax Competition and Tax Coordination When Countries Differ in Size," American Economic Review, American Economic Association, vol. 83(4), pages 877-892, September.
    26. Dembour, Carole & Wauthy, Xavier, 2009. "Investment in public infrastructure with spillovers and tax competition between contiguous regions," Regional Science and Urban Economics, Elsevier, vol. 39(6), pages 679-687, November.
    27. Anant, T. C. A. & Basu, Kaushik & Mukherji, Badal, 1995. "A model of monopoly with strategic government intervention," Journal of Public Economics, Elsevier, vol. 57(1), pages 25-43, May.
    28. Eckhard Janeba, 2000. "Tax Competition When Governments Lack Commitment: Excess Capacity as a Countervailing Threat," American Economic Review, American Economic Association, vol. 90(5), pages 1508-1519, December.
    29. Forbes, Kevin F & Zampelli, Ernest M, 1989. "Is Leviathan a Mythical Beast?," American Economic Review, American Economic Association, vol. 79(3), pages 568-577, June.
    30. Mutsumi Matsumoto, 2010. "Entry in tax competition: a note," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 17(6), pages 627-639, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hiroshi Aiura & Hikaru Ogawa, 2019. "Indirect taxes in a cross-border shopping model: a monopolistic competition approach," Journal of Economics, Springer, vol. 128(2), pages 147-175, October.
    2. Wang, Wenming & Ogawa, Hikaru, 2018. "Objectives of governments in tax competition: Role of capital supply elasticity," International Review of Economics & Finance, Elsevier, vol. 54(C), pages 225-231.
    3. Florence Lachet-Touya, 2016. "EU tax competition and tax avoidance: A multiprincipal perspective," Working Papers hal-02939340, HAL.
    4. Ajay Sharma, 2018. "A note on Stackelberg equilibrium in duopoly: Strategic use of corporate social responsibility," Economics Bulletin, AccessEcon, vol. 38(4), pages 1720-1726.
    5. Florence Lachet-Touya, 2016. "Horizontal and Vertical Tax Interactions in a Common Agency Game," Working papers of CATT hal-02939399, HAL.
    6. Pal, Rupayan & Sharma, Ajay, 2016. "Competition for Foreign Capital under Asymmetric Revenue-Orientation," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 51(1), pages 105-116.
    7. Florence TOUYA, 2016. "Horizontal and Vertical Tax Interactions in a Common Agency Game," Working Papers 2015-2016_12, CATT - UPPA - Université de Pau et des Pays de l'Adour, revised Aug 2016.
    8. Florence Lachet-Touya, 2016. "EU tax competition and tax avoidance: A multiprincipal perspective," Working papers of CATT hal-02939340, HAL.
    9. Hikaru Ogawa & Taiki Susa, 2017. "Strategic delegation in asymmetric tax competition," Economics and Politics, Wiley Blackwell, vol. 29(3), pages 237-251, November.
    10. Satoshi Kasamatsu & Daiki Kishishita, 2021. "Tax competition and political agency problems," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(4), pages 1782-1810, November.
    11. Sharma, Ajay, 2017. "Stackelberg equilibrium in duopoly: strategic use of corporate social responsibility," MPRA Paper 84326, University Library of Munich, Germany.
    12. Florence TOUYA, 2016. "EU tax competition and tax avoidance: A multiprincipal perspective," Working Papers 2015-2016_11, CATT - UPPA - Université de Pau et des Pays de l'Adour, revised Aug 2016.
    13. Keisuke Kawachi & Hikaru Ogawa & Taiki Susa, 2019. "Endogenizing government’s objectives in tax competition with capital ownership," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 26(3), pages 571-594, June.
    14. Florence Lachet-Touya, 2016. "Horizontal and Vertical Tax Interactions in a Common Agency Game," Working Papers hal-02939399, HAL.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Rupayan Pal & Ajay Sharma, 2011. "Competition for foreign capital: Endogenous objective, public investment and tax," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2011-021, Indira Gandhi Institute of Development Research, Mumbai, India.
    2. Rupayan Pal & Ajay Sharma, 2019. "Preferences over Public Good, Political Delegation, and Leadership in Tax Competition," Public Finance Review, , vol. 47(4), pages 718-746, July.
    3. Keisuke Kawachi & Hikaru Ogawa & Taiki Susa, 2019. "Endogenizing government’s objectives in tax competition with capital ownership," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 26(3), pages 571-594, June.
    4. Rupayan Pal & Ajay Sharma, 2011. "Political competition and leadership in tax competition," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2011-024, Indira Gandhi Institute of Development Research, Mumbai, India.
    5. Wang, Wenming & Ogawa, Hikaru, 2018. "Objectives of governments in tax competition: Role of capital supply elasticity," International Review of Economics & Finance, Elsevier, vol. 54(C), pages 225-231.
    6. Sharma, Ajay & Pal, Rupayan, 2019. "Nash equilibrium in tax and public investment competition," International Review of Economics & Finance, Elsevier, vol. 62(C), pages 106-120.
    7. Satoshi Kasamatsu & Daiki Kishishita, 2021. "Tax competition and political agency problems," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(4), pages 1782-1810, November.
    8. Hikaru Ogawa & Taiki Susa, 2017. "Strategic delegation in asymmetric tax competition," Economics and Politics, Wiley Blackwell, vol. 29(3), pages 237-251, November.
    9. Grégoire ROTA-GRAZIOSI, 2016. "Implementing Tax Coordination and Harmonization through Voluntary Commitment," Working Papers P181, FERDI.
    10. Ihori, Toshihiro & Yang, C.C., 2009. "Interregional tax competition and intraregional political competition: The optimal provision of public goods under representative democracy," Journal of Urban Economics, Elsevier, vol. 66(3), pages 210-217, November.
    11. Pal, Rupayan & Sharma, Ajay, 2016. "Competition for Foreign Capital under Asymmetric Revenue-Orientation," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 51(1), pages 105-116.
    12. Patricia Sanz‐Córdoba & Bernd Theilen, 2018. "Partial Tax Harmonization Through Infrastructure Coordination," Economic Inquiry, Western Economic Association International, vol. 56(2), pages 1399-1416, April.
    13. Yutao Han & Patrice Pieretti & Benteng Zou, 2017. "On The Desirability Of Tax Coordination When Countries Compete In Taxes And Infrastructure," Economic Inquiry, Western Economic Association International, vol. 55(2), pages 682-694, April.
    14. Toshihiro Ihori & C. C. Yang, 2008. "Interregional Tax Competition and Intraregional Political Competition: The Optimal Provision of Public Goods," CIRJE F-Series CIRJE-F-553, CIRJE, Faculty of Economics, University of Tokyo.
    15. Yutao Han & Xi Wan, 2019. "Who benefits from partial tax coordination?," The World Economy, Wiley Blackwell, vol. 42(5), pages 1620-1640, May.
    16. Yutao Han & Patrice Pieretti & Giuseppe Pulina, 2023. "The impact of tax and infrastructure competition on the profitability of local firms," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(2), pages 281-304, April.
    17. Carsten Eckel & Yutao Han & Kate Hynes & Jin Zhang, 2021. "Structural fund, endogenous move and commitment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(2), pages 465-482, April.
    18. Yutao Han, 2013. "Who benefits from partial tax coordination?," DEM Discussion Paper Series 13-24, Department of Economics at the University of Luxembourg.
    19. Michael Keen & Christos Kotsogiannis, 2003. "Leviathan and Capital Tax Competition in Federations," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(2), pages 177-199, April.
    20. George Crowley & Russell Sobel, 2011. "Does fiscal decentralization constrain Leviathan? New evidence from local property tax competition," Public Choice, Springer, vol. 149(1), pages 5-30, October.

    More about this item

    Keywords

    Mobile capital; Tax competition; Revenue orientation; Social welfare; Endogenous objective;
    All these keywords.

    JEL classification:

    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
    • R38 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Government Policy
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:regeco:v:43:y:2013:i:4:p:570-578. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/regec .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.