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Imperfect Competition and Optimal Taxation

Author

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  • Andrea Colciago

Abstract

This paper provides optimal labor and dividend income taxation in a general equilibrium model with oligopolistic competition and endogenous firms' entry. In the long run the optimal dividend income tax corrects for inefficient entry. The dividend income tax depends on the form of competition and nature of the sunk entry costs. In particular, it is higher in market structures characterized by competition in quantities with respect to those characterized by price competition. Oligopolistic competition leads to an endogenous countercyclical price markup. As a result offsetting the distortions over the business cycle requires deviations from full tax smoothing.

Suggested Citation

  • Andrea Colciago, 2013. "Imperfect Competition and Optimal Taxation," DNB Working Papers 383, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:383
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    Keywords

    Firms' Entry; Market Stuctures; Market Distortions; Optimal Dividend Income Tax;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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