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Tax Competition for Heterogeneous Firms with Endogenous Entry

  • Ronald B. Davies

    ()

    (University of Oregon Economics Department)

  • Carsten Eckel

    ()

    (University of Goettingen)

This paper models tax competition for mobile firms that are differentiated by the amount of labor needed to cover fixed costs. Because tax competition affects the distribution of firms, it affects both relative equilibrium wages across countries and equilibrium prices. These in turn influence the equilibrium number of firms. From the social planner's perspective, optimal tax rates are harmonized, providing the optimal number of firms, and set such that income is efficiently distributed between private and public consumption. As is common in tax competition models, in the Nash equilibrium tax rates are inefficiently low, yielding underprovision of public goods. Furthermore, there exist a variety of situations in which equilibrium tax rates differ. As a result, too many firms enter the market as governments compete to be the low-tax, high-wage country. This illustrates a new distortion from tax competition and provides an additional benefit from tax harmonization.

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Paper provided by University of Oregon Economics Department in its series University of Oregon Economics Department Working Papers with number 2007-6.

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Length: 41
Date of creation: 02 Mar 2007
Date of revision:
Handle: RePEc:ore:uoecwp:2007-6
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  1. Yeaple, Stephen & Helpman, Elhanan & Melitz, Marc, 2004. "Export versus FDI with Heterogeneous Firms," Scholarly Articles 3229098, Harvard University Department of Economics.
  2. Ghironi, Fabio & Melitz, Marc J, 2004. "International Trade and Macroeconomic Dynamics with Heteroegenous Firms," CEPR Discussion Papers 4595, C.E.P.R. Discussion Papers.
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  7. Ronald B. Davies & Carsten Eckel, 2007. "Tax Competition for Heterogeneous Firms with Endogenous Entry:The Case of Heterogeneous Fixed Costs," The Institute for International Integration Studies Discussion Paper Series iiisdp213, IIIS.
  8. Clemens Fuest & Bernd Huber & Jack Mintz, 2003. "Capital Mobility and Tax Competition: A Survey," CESifo Working Paper Series 956, CESifo Group Munich.
  9. Bjorvatn, Kjetil & Eckel, Carsten, 2006. "Policy competition for foreign direct investment between asymmetric countries," Munich Reprints in Economics 20270, University of Munich, Department of Economics.
  10. Ronald B. Davies & Christopher J. Ellis, 2001. "Competition in Taxes and Performance Requirements for Foreign Direct Investment," University of Oregon Economics Department Working Papers 2001-4, University of Oregon Economics Department, revised 01 Jun 2001.
  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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  14. Janeba, Eckhard, 1998. "Tax competition in imperfectly competitive markets," Journal of International Economics, Elsevier, vol. 44(1), pages 135-153, February.
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  18. repec:cup:cbooks:9780521027922 is not listed on IDEAS
  19. Susan E. Feinberg & Michael P. Keane, 2001. "U.S.-Canada Trade Liberalization And Mnc Production Location," The Review of Economics and Statistics, MIT Press, vol. 83(1), pages 118-132, February.
  20. Davies, Ronald B., 2005. "State tax competition for foreign direct investment: a winnable war?," Journal of International Economics, Elsevier, vol. 67(2), pages 498-512, December.
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  22. Black, Dan A & Hoyt, William H, 1989. "Bidding for Firms," American Economic Review, American Economic Association, vol. 79(5), pages 1249-56, December.
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  24. Janeba,Eckhard, 1991. "Corporate income tax competition,Double taxation treaties, and foreign direct investment," Discussion Paper Serie A 361, University of Bonn, Germany.
  25. Markusen, James R., 1984. "Multinationals, multi-plant economies, and the gains from trade," Journal of International Economics, Elsevier, vol. 16(3-4), pages 205-226, May.
  26. Jeremy Edwards & Michael Keen, 1994. "Tax competition and Leviathon," IFS Working Papers W94/07, Institute for Fiscal Studies.
  27. Haufler, Andreas & Wooton, Ian, 2006. "The effects of regional tax and subsidy coordination on foreign direct investment," Munich Reprints in Economics 19926, University of Munich, Department of Economics.
  28. repec:cup:cbooks:9780521233293 is not listed on IDEAS
  29. Thomas A. Gresik, 2001. "The Taxing Task of Taxing Transnationals," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 800-838, September.
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