Stability of coalitional equilibria within repeated tax competition

Sonja Brangewitz and Sarah Brockhoff
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Sonja Brangewitz: Center for Mathematical Economics, Bielefeld University
Sarah Brockhoff: Center for Mathematical Economics, Bielefeld University

No 461, Center for Mathematical Economics Working Papers from Center for Mathematical Economics, Bielefeld University

Abstract: This paper analyzes the stability of capital tax harmonization agreements in a stylized model where countries have formed coalitions which set a common tax rate in order to avoid the inefficient fully noncooperative Nash equilibrium. In particular, for a given coalition structure we study to what extend the stability of tax agreements is affected by the coalitions that have formed. In our set-up, countries are symmetric, but coalitions can be of arbitrary size. We analyze stability by means of a repeated game setting employing simple trigger strategies and we allow a sub-coalition to deviate from the coalitional equilibrium. For a given form of punishment we are able to rank the stability of different coalition structures as long as the size of the largest coalition does not change. Our main results are: (1) singleton regions have the largest incentives to deviate, (2) the stability of cooperation depends on the degree of cooperative behavior ex-ante.

Keywords: tax coordination; repeated game; coalitional equilibria; capital tax competition (search for similar items in EconPapers)
Pages: 46
Date: 2014-04-15
New Economics Papers: this item is included in nep-cdm, nep-gth and nep-pbe
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https://pub.uni-bielefeld.de/download/2671721/2671722 First Version, 2012 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:bie:wpaper:461

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