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American Economic Review: Vol. 102 No. 5 (August 2012)

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Interjurisdictional Spillovers, Decentralized Policymaking, and the Elasticity of Capital Supply

Article Citation

Eichner, Thomas, and Marco Runkel. 2012. "Interjurisdictional Spillovers, Decentralized Policymaking, and the Elasticity of Capital Supply." American Economic Review, 102(5): 2349-57.

DOI: 10.1257/aer.102.5.2349

Abstract

This paper points to the important role that the elasticity of aggregate capital supply with respect to the net rate of return to capital plays for the efficiency of policymaking in a decentralized economy with mobile capital and spillovers among jurisdictions. In accordance with previous studies, we show that under the assumption of a fixed capital supply (zero capital supply elasticity) the decentralized policy choice is optimal. If the capital supply elasticity is strictly positive, however, capital tax rates are inefficiently low in the decentralized equilibrium. (JEL E22, E61, H25, H77)

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Online Appendix (34.70 KB)

Authors

Eichner, Thomas (U Hagen)
Runkel, Marco (Berlin U Technology)

JEL Classifications

E22: Capital; Investment; Capacity
E61: Policy Objectives; Policy Designs and Consistency; Policy Coordination
H25: Business Taxes and Subsidies including sales and value-added (VAT)
H77: Intergovernmental Relations; Federalism; Secession


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