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Taxation and Incomplete Contracts

Author

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  • Simone Moriconi

    (DISCE,Università Cattolica)

Abstract

This paper analyzes the impact of taxation on economic efficiency when contracts are incomplete, firms operate in a perfect competitive market and can choose between integrated or non-integrated governance to cope with contract incompleteness. Taxation reduces incentives to pursue intra-firm coordination, thus the efficiency of firm's production process under non-integration. This is not the case under integration, since production decisions are transferred to the Headquarters, at a fixed integration cost. Taxation may then induce firms to change their organization at the industry equilibrium. We show that a tax that induces firms to choose integration rather than non-integration may serve a corrective function if integration costs and market prices are not too high.

Suggested Citation

  • Simone Moriconi, 2012. "Taxation and Incomplete Contracts," DISCE - Quaderni dell'Istituto di Teoria Economica e Metodi Quantitativi itemq1263, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    • Handle: RePEc:ctc:serie6:itemq1263
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    File URL: http://istituti.unicatt.it/teoria_economica_metodi_quantitativi_itemq1263.pdf
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    Keywords

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    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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