Cross-border casino competition, Externalities and Optimal Tax Policy: A Unified Theory with Quantitative Analysis

Juin-jen Chang, Ingo Fiedler, Ching-chong Lai and Ping Wang

Regional Science and Urban Economics, 2021, vol. 88, issue C

Abstract: We develop a framework on cross-border competition in markets for goods with negative externalities and provide evidence for optimal fiscal policy with a special focus on taxation. We build the case of two bordering casinos with city governments setting taxes to maximize social welfare. Analytically, we show that cross-border casino gambling makes aggregate casino demand more elastic. By calibrating the model to fit the Detroit-Windsor market, our welfare analysis shows that cross-border competition induces both cities to lower casino taxes, while the optimal tax mix features a shift from the casino revenue tax to the good and service surcharge on gambling in Detroit but a reversed shift in Windsor. We also find a casino buy-out deal to not be credible because Windsor's willingness to pay Detroit to ban Michigan casinos is far below Detroit's willingness to accept giving up its casinos.

Keywords: Cross-border casino competition; Gambling externalities; Optimal tax policy (search for similar items in EconPapers)
JEL-codes: D21 D43 D62 H20 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:regeco:v:88:y:2021:i:c:s0166046221000132

DOI: 10.1016/j.regsciurbeco.2021.103653

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