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

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  • Hubert Kempf

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

  • Grégoire Rota-Graziosi

    () (CERDI - Centre d'Études et de Recherches sur le Développement International - UdA - Université d'Auvergne - Clermont-Ferrand I - CNRS - Centre National de la Recherche Scientifique)

Abstract

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.

Suggested Citation

  • Hubert Kempf & Grégoire Rota-Graziosi, 2010. "And the tax winner is ... A note on endogenous timing in the commodity taxation race," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00492104, HAL.
  • Handle: RePEc:hal:cesptp:halshs-00492104 Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00492104
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    More about this item

    Keywords

    Concurrence fiscale; complémentarité stratégique; équilibre de Stackelberg; risque-dominance.; Commitment; commodity tax competition; strategic complements; Stackelberg equilibrium; Pareto dominance; risk dominance.;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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