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A note on equilibrium leadership in tax competition models

Jean Hindriks () and Yukihiro Nishimura

Journal of Public Economics, 2015, vol. 121, issue C, 66-68

Abstract: This paper reexamines the work of Kempf and Rota-Graziosi (J. Pub. Econ. 94: 768-776, 2010), which shows that leadership by the small region is the risk dominant equilibrium under the endogenous timing game. They obtained this result in a model where the asymmetry among regions translates into different gradients of the demand for capital but identical vertical intercepts. In this paper, we simply reverse the form of asymmetry by considering different vertical intercepts but identical gradients. The reason is that market power is typically related to the intercept and not to the slope of the demand function. We then show that leadership by the large region becomes the risk dominant equilibrium and can even become Pareto superior.

Keywords: Endogenous timing; Tax competition; Reaction function (search for similar items in EconPapers)
JEL-codes: H30 H87 C72 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1016/j.jpubeco.2014.11.002

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