Efficiency and Incidence of Taxation with Free Entry and Love-of-Variety Preferences
American Economic Journal: Economic Policy
vol. 16,
no. 2, May 2024
(pp. 300-334)
Abstract
We develop a theory of commodity taxation featuring imperfect competition along with love-of-variety preferences and endogenous firm entry and exit. We derive new formulas for the efficiency and pass-through of specific and ad valorem taxes. These formulas unify existing canonical ones and feature a new term capturing the effect of variety on consumer surplus. As a proof of concept, we use theoretical formulas to identify love-of-variety preferences in an empirical application. Our welfare analysis shows that the marginal excess burden is sensitive to the estimated love of variety, which overturns classical results on the desirability of ad valorem versus specific taxation.Citation
Kroft, Kory, Jean-William Laliberté, René Leal-Vizcaíno, and Matthew J. Notowidigdo. 2024. "Efficiency and Incidence of Taxation with Free Entry and Love-of-Variety Preferences." American Economic Journal: Economic Policy, 16 (2): 300-334. DOI: 10.1257/pol.20220007Additional Materials
JEL Classification
- D11 Consumer Economics: Theory
- D21 Firm Behavior: Theory
- D91 Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
- H25 Business Taxes and Subsidies including sales and value-added (VAT)
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