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Increasing Returns, Learning, and Beneficial Tax Competition


  • Honkapohja, Seppo

    (University of Cambridge)

  • Turunen-Red, Arja H.

    (University of New Orleans)


We analyze the welfare impact of entrepreneur mobility in a two-country model. Increasing returns in production yield multiple equilibria that are stable under adaptive learning. Governments compete for the mobile resource by setting income taxes. We show that large welfare gains can arise from noncooperative taxation. If expectational barriers prevent the realization of high output equilibria, tax competition can sufficiently perturb expectations so that high steady states become attainable. Once in a high production regime, governments may institute cooperative tax increases or reductions so as to bring the economy to the global joint optimum without disturbing the regime.

Suggested Citation

  • Honkapohja, Seppo & Turunen-Red, Arja H., 2005. "Increasing Returns, Learning, and Beneficial Tax Competition," Working Papers 2005-09, University of New Orleans, Department of Economics and Finance.
  • Handle: RePEc:uno:wpaper:2005-09

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    References listed on IDEAS

    1. Devereux, Michael P. & Lockwood, Ben & Redoano, Michela, 2008. "Do countries compete over corporate tax rates?," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1210-1235, June.
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    More about this item


    Competition for mobile factors; Overlapping generations; Multiple equilibria; Bifurcations;

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • F2 - International Economics - - International Factor Movements and International Business
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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