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  3. American Economic Review
  4. August 2012
  5. Interjurisdictional Spillovers, Decentralized Policymaking, and the Elasticity of Capital Supply

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

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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)

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

Additional Materials

JEL Classification

  • 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