Taxation and Incomplete Contracts

Simone Moriconi

DEM Discussion Paper Series from Department of Economics at the University of Luxembourg

Abstract: This paper analyzes the impact of taxation on economic effciency when contracts are incomplete. We assume 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 effciency 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 and economic effciency (search for similar items in EconPapers)
JEL-codes: H21 H32 L22 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-cta, nep-mic, nep-pbe and nep-pub
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Working Paper: Taxation and Incomplete Contracts (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:luc:wpaper:12-08

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