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A note on Kanbur and Keen : transfers to sustain fiscal cooperation

  • VERDONCK, Magali
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    We analyze the two-country model of fiscal competition of Kanbur and Keen (1993) where countries differ in size and use a commodity tax to reach their objective of revenue maximization. Due to fiscal externalities, the non-cooperative outcome is inefficient. Besides, the international optimum could be individually irrational for the smaller country compared to the non-cooperative equilibrium. The purpose of this paper is to examine whether the international optimum can be reached and sustained by means of financial transfers between the countries as suggested in another context by Chander and Tulkens (1995, 1997). We show that with transfers of a specific form internationally optimal fiscal cooperation is indeed individually rational for both countries and, in that sense, sustainable. Furthermore, we show that these transfers can be such that the optimal outcome is, under some conditions, a dominant strategy for both countries.

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    Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2004002.

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    Date of creation: 00 Feb 2004
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    Handle: RePEc:cor:louvco:2004002
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    1. Charles Figuieres & Jean Hindriks & Gareth D. Myles, 2004. "Revenue Sharing versus Expenditure Sharing in a Federal System," International Tax and Public Finance, Springer, vol. 11(2), pages 155-174, 03.
    2. 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 877-92, September.
    3. Robin W. Boadway & Frank R. Flatters, 1982. "Efficiency and Equalization Payments in a Federal System of Government: A Synthesis and Extension of Recent Results," Canadian Journal of Economics, Canadian Economics Association, vol. 15(4), pages 613-33, November.
    4. Henry Tulkens & Parkash Chander, 1997. "The Core of an Economy with Multilateral Environmental Externalities," International Journal of Game Theory, Springer, vol. 26(3), pages 379-401.
    5. repec:cup:cbooks:9780521782760 is not listed on IDEAS
    6. Sam Bucovetsky & Michael Smart, 2002. "The Efficiency Consequences of Local Revenue Equalization: Tax Competition and Tax Distortions," CESifo Working Paper Series 767, CESifo Group Munich.
    7. CURRARINI , Sergio & TULKENS, Henry, . "Stable international agreements on transfrontier pollution with ratification constraints," CORE Discussion Papers RP -1715, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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