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The Principle and Market Failure in Systems Competition

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  • Hans-Werner Sinn

Abstract

Contrary to a frequent contention, systems competition cannot work when governments respect the Subsidiarity Principle. The principle implies that governments step in where markets fail. Reintroducing markets through the back door of systems competition will again result in market failure. Three models are presented which illustrate this wisdom. The first is concerned with congestion-prone public goods and shows that fiscal competition may be ruinous for the governments. The second considers the insurance function of redistributive taxation and shows that systems competition may suffer from adverse selection. The third studies the role of quality regulation and shows that systems competition may be a competition of laxity resulting in inefficiently low quality standards.

Suggested Citation

  • Hans-Werner Sinn, 1996. "The Principle and Market Failure in Systems Competition," NBER Working Papers 5411, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:5411
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    References listed on IDEAS

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    11. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
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    Cited by:

    1. Michael Keen & Kai A. Konrad, 2012. "International Tax Competition and Coordination," Working Papers international_tax_competi, Max Planck Institute for Tax Law and Public Finance.

    More about this item

    JEL classification:

    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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