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Ad valorem versus per unit taxation: a perspective from price signaling

Honglin Li and Xiaolu Liu ()
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Honglin Li: School of Business, University of Wisconsin-Madison
Xiaolu Liu: Renmin University of China

Journal of Economics, 2021, vol. 134, issue 1, No 2, 27-47

Abstract: Abstract This paper compares ad valorem and per unit taxation in the context of price signaling. In the model, a taxation designer chooses between ad valorem and per unit taxation to maximize tax revenues, and a monopoly firm, whose product quality can be either high or low, uses price as a quality signal. The analysis shows that, compared to per unit taxation, ad valorem taxation raises the low-quality firm’s mimicking cost and lowers the high-quality firm’s signaling cost. This leads to higher transaction volumes and tax revenues.

Keywords: Asymmetric information; Price signal; Ad valorem taxation; Per unit taxation; Product quality (search for similar items in EconPapers)
JEL-codes: D4 D82 L1 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s00712-021-00736-w

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