Efficiency and Incidence of Taxation with Free Entry and Love-of-Variety Preferences

Kory Kroft, Jean-William Laliberté, René Leal-Vizcaíno and Matthew Notowidigdo

American Economic Journal: Economic Policy, 2024, vol. 16, issue 2, 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.

JEL-codes: D11 D21 D91 H25 (search for similar items in EconPapers)
Date: 2024
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Working Paper: Efficiency and Incidence of Taxation with Free Entry and Love-of-Variety Preferences (2021)
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DOI: 10.1257/pol.20220007

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