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American Economic Journal: Economic Policy: Vol. 2 No. 1 (February 2010)

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Tax Competition for Heterogeneous Firms with Endogenous Entry

Article Citation

Davies, Ronald B., and Carsten Eckel. 2010. "Tax Competition for Heterogeneous Firms with Endogenous Entry." American Economic Journal: Economic Policy, 2(1): 77-102.

DOI: 10.1257/pol.2.1.77

Abstract

This paper models tax competition for mobile firms that are differentiated by their productivities. Because taxes affect the distribution of firms, they affect wages, prices, and the number of firms. From the social planner's perspective, optimal taxes efficiently distribute income between private and public consumption and are harmonized, providing the optimal number of firms. This is not a Nash equilibrium. As is common in such models, equilibrium taxes are inefficiently low. Furthermore, there is no pure strategy equilibrium with equal taxes resulting in too many firms. This illustrates a new distortion from tax competition and a new benefit from harmonization. (JEL H21, H25, H87)

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Authors

Davies, Ronald B. (U College Dublin)
Eckel, Carsten (U Bamberg)

JEL Classifications

H21: Taxation and Subsidies: Efficiency; Optimal Taxation
H25: Business Taxes and Subsidies including sales and value-added (VAT)
H87: International Fiscal Issues; International Public Goods

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