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And the tax winner is ... A note on endogenous timing in the commodity taxation race

  • Hubert Kempf


    (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS, Banque de France - Direction de la Recherche)

  • Grégoire Rota-Graziosi


    (CERDI - Centre d'études et de recherches sur le developpement international - CNRS - Université d'Auvergne - Clermont-Ferrand I)

This note investigates the endogenous choice of leadership in commodity tax competition. We apply an endogenous timing game, where jurisdictions commit themselves to lead or to follow, to the Kanbur and Keen (1993) model. We show that the Subgame Pefect Nash Equilibria (SPNE) correspond to the two Stackelberg situations, yielding to a coordination issue. Selecting an equilibrium by means of the risk-dominance criterion, we prove that the smaller country has to lead. If asymmetry among countries is sufficient Pareto-dominance reinforces risk-dominance in selecting the same SPE. We deduce two important results for the literature of tax competition : when countries differ sufficiently by their size, the "big-country-higher-tax" rule does not hold anymore ; when countries are close in size, tax harmonization through a unique tax rate among countries occurs without any international agreement.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00492104.

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Date of creation: May 2010
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Publication status: Published in Documents de travail du Centre d'Economie de la Sorbonne 2010.38 - ISSN : 1955-611X. 2010
Handle: RePEc:hal:cesptp:halshs-00492104
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