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Taxation and Incomplete Contracts

  • Simone Moriconi


    (ITEMQ, Università Cattolica di Milano and CREA, University of Luxembourg)

This paper analyzes the impact of taxation on economic effciency when contracts are incomplete. We assume 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 effciency 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.

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Paper provided by Center for Research in Economic Analysis, University of Luxembourg in its series CREA Discussion Paper Series with number 12-08.

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Date of creation: 2012
Date of revision:
Handle: RePEc:luc:wpaper:12-08
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  2. Simon P. Anderson & Andre de Palma & Brent Kreider, 2000. "The Efficiency of Indirect Taxes under Imperfect Competition," Virginia Economics Online Papers 342, University of Virginia, Department of Economics.
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  7. Macher Jeffrey T & Richman Barak D, 2008. "Transaction Cost Economics: An Assessment of Empirical Research in the Social Sciences," Business and Politics, De Gruyter, vol. 10(1), pages 1-65, May.
  8. Williamson, Oliver E., 2009. "Transaction Cost Economics: The Natural Progression," Nobel Prize in Economics documents 2009-3, Nobel Prize Committee.
  9. Oliver Hart & John Moore, 2006. "Contracts as Reference Points," ESE Discussion Papers 170, Edinburgh School of Economics, University of Edinburgh.
  10. Daron Acemoglu & Philippe Aghion & Claire Lelarge & John Van Reenen & Fabrizio Zilibotti, 2006. "Technology, Information and the Decentralization of the Firm," CEP Discussion Papers dp0722, Centre for Economic Performance, LSE.
  11. Oliver Hart & John Moore, 1999. "On the Design of Hierarchies: Coordination Versus Specialization," STICERD - Theoretical Economics Paper Series 375, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  12. Williamson, Oliver E, 1971. "The Vertical Integration of Production: Market Failure Considerations," American Economic Review, American Economic Association, vol. 61(2), pages 112-23, May.
  13. Kay, J. A. & Keen, M. J., 1983. "How should commodities be taxed? : Market structure, product heterogeneity and the optimal structure of commodity taxes," European Economic Review, Elsevier, vol. 23(3), pages 339-358, September.
  14. Patrick Legros & Andrew F. Newman, 2013. "A Price Theory of Vertical and Lateral Integration," The Quarterly Journal of Economics, Oxford University Press, vol. 128(2), pages 725-770.
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