Tax Competition with Heterogeneous Firms

Richard Baldwin and Toshihiro Okubo

No 9969, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper studies tax competition in an economic geography model that allows for agglomeration economies with trade costs and heterogeneous firms. We find that the Nash equilibrium involves the large country charging a higher tax than the small nation. Lower trade costs lead to an intensification of competition, a drop in Nash tax rates, and a narrowing of the gap. Since large, productive firms are naturally more sensitive to tax differences in our model, large firms are the crux of tax competition in our model. This also means that tax competition has consequences for the average productivity of the big and small nations' industry; by lowering tax rates, the small nation can attract high-productivity firms.

Keywords: Average productivity; Firm heterogeneity; Nash equilibrium tax; Spatial sorting; Tax cooperation (search for similar items in EconPapers)
JEL-codes: H32 P16 (search for similar items in EconPapers)
Date: 2014-05
New Economics Papers: this item is included in nep-geo, nep-pbe and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Related works:
Journal Article: Tax Competition with Heterogeneous Firms (2014)
Working Paper: Tax Competition with Heterogeneous Firms (2014)
Working Paper: Tax Competition with Heterogeneous Firms (2009)
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