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Corporation Tax Asymmetries: An Oligopolistic Supergame Analysis

  • Pierre-Pascal Gendron
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    Corporation tax systems around the world treat gains and losses asymmetrically. This paper examines the impact of changing the refundability of tax losses in a cash flow tax system. A dynamic game of complete information is used to analyse refund policies in an imperfectly competitive setting. In this supergame, firms produce a homogeneous good and sustain tacit collusion by using credible and severe punishments of deviations. The analysis of the most collusive equilibrium with losses indicates that a tax policy which increases refundability has the following impacts: it reduces collusive industry output, increases market price, and therefore enhances tacit collusion. This policy also reduces social welfare even though refunds are never given in equilibrium.

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    File URL: http://www.economics.utoronto.ca/public/workingPapers/UT-ECIPA-ECPAP-96-04.ps
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    File URL: http://www.economics.utoronto.ca/public/workingPapers/UT-ECIPA-ECPAP-96-04.pdf
    File Function: MainText
    Download Restriction: no

    Paper provided by University of Toronto, Department of Economics in its series Working Papers with number ecpap-96-04.

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    Length: 31 pages
    Date of creation: 08 Jul 1996
    Date of revision:
    Handle: RePEc:tor:tecipa:ecpap-96-04
    Contact details of provider: Postal: 150 St. George Street, Toronto, Ontario
    Phone: (416) 978-5283

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    1. Joseph E. Stiglitz, 1968. "The Effects of Income, Wealth, and Capital Gains Taxation on Risk Taking," Cowles Foundation Discussion Papers 248, Cowles Foundation for Research in Economics, Yale University.
    2. Auerbach, Alan J, 1986. "The Dynamic Effects of Tax Law Asymmetries," Review of Economic Studies, Wiley Blackwell, vol. 53(2), pages 205-25, April.
    3. Rosanne Altshuler & Alan J. Auerbach, 1987. "The Significance of Tax Law Asymmetries: An Empirical Investigation," NBER Working Papers 2279, National Bureau of Economic Research, Inc.
    4. Abreu, Dilip, 1986. "Extremal equilibria of oligopolistic supergames," Journal of Economic Theory, Elsevier, vol. 39(1), pages 191-225, June.
    5. repec:cup:cbooks:9780521497695 is not listed on IDEAS
    6. Rees, Ray, 1993. "Collusive Equilibrium in the Great Salt Duopoly," Economic Journal, Royal Economic Society, vol. 103(419), pages 833-48, July.
    7. Fudenberg, Drew, 1986. "Noncooperative Game Theory for Industrial Organization: An Introduction and Overview," Department of Economics, Working Paper Series qt9j39n20f, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    8. Rees, Ray, 1993. "Collusive Equilibrium in the Great Salt Duopoly," Munich Reprints in Economics 3413, University of Munich, Department of Economics.
    9. Shapiro, Carl, 1989. "Theories of oligopoly behavior," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 6, pages 329-414 Elsevier.
    10. Edwards, J S S & Keen, M J, 1985. "Inflation and Non-neutralities in the Taxation of Corporate," Oxford Economic Papers, Oxford University Press, vol. 37(4), pages 552-75, December.
    11. Davidson, Carl & Martin, Lawrence W, 1985. "General Equilibrium Tax Incidence under Imperfect Competition: A Quantity-setting Supergame Analysis," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1212-23, December.
    12. Mintz, Jack M, 1981. "Some Additional Results on Investment, Risk Taking, and Full Loss Offset Corporate Taxation with Interest Deductibility," The Quarterly Journal of Economics, MIT Press, vol. 96(4), pages 631-42, November.
    13. Friedman, James W, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Wiley Blackwell, vol. 38(113), pages 1-12, January.
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