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Productivity Gaps and Tax Policies Under Asymmetric Trade

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  • Lucas Bretschger

    () (ETH Zürich, Switzerland)

  • Simone Valente

    () (University of East Anglia, United Kingdom)

Abstract

We build a two-country model of endogenous growth to study the welfare effects of taxes on tradable primary inputs when countries engage in asymmetric trade. We obtain explicit links between persistent gaps in productivity growth and the incentives of resource exporting (importing) countries to subsidize (tax) domestic resource use. The exporters' incentive to subsidize hinges on slower productivity growth and is disconnected from the importers' incentive to tax resource inflows i.e., rent extraction. Moreover, faster productivity growth exacerbates the im- porters' incentive to tax, beyond the rent-extraction motive. In a strategic tax game, the only equilibrium is of Stackelberg type and features, for a wide range of parameter values, positive exporters' subsidies and importers' taxes at the same time. The model predictions concerning the impact of resource taxes on relative income shares are supported by empirical evidence.

Suggested Citation

  • Lucas Bretschger & Simone Valente, 2016. "Productivity Gaps and Tax Policies Under Asymmetric Trade," CER-ETH Economics working paper series 16/239, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    • Handle: RePEc:eth:wpswif:16-239
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    References listed on IDEAS

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    More about this item

    Keywords

    Productivity Gaps; Endogenous Growth; International Trade; Tax Policy;

    JEL classification:

    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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