Taxation and Incomplete Contracts

Simone Moriconi

No itemq1263, DISCE - Quaderni dell'Istituto di Teoria Economica e Metodi Quantitativi from Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE)

Abstract: This paper analyzes the impact of taxation on economic efficiency when contracts are incomplete, firms operate in a perfect competitive market and can choose between integrated or non-integrated governance to cope with contract incompleteness. Taxation reduces incentives to pursue intra-firm coordination, thus the efficiency of firm's production process under non-integration. This is not the case under integration, since production decisions are transferred to the Headquarters, at a fixed integration cost. Taxation may then induce firms to change their organization at the industry equilibrium. We show that a tax that induces firms to choose integration rather than non-integration may serve a corrective function if integration costs and market prices are not too high.

Keywords: taxation; incomplete contracts; economic efficiency (search for similar items in EconPapers)
JEL-codes: H21 H32 L22 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2012-07
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Working Paper: Taxation and Incomplete Contracts (2012)
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