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Stability of Coalitional Equilibria within Repeated Tax Competition

Sonja Brangewitz () and Sarah Brockhoff ()
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Sonja Brangewitz: University of Paderborn
Sarah Brockhoff: University of Freiburg

No 48, Working Papers CIE from Paderborn University, CIE Center for International Economics

Abstract: This paper analyzes the stability of capital tax harmonization agree- ments in a stylized model where countries have formed coalitions which set a common tax rate in order to avoid the inefficient fully non- cooperative Nash equilibrium. In particular, for a given coalition struc- ture we study to what extend the stability of tax agreements is affected by the coalitions that have formed. In our set-up, countries are sym- metric, but coalitions can be of arbitrary size. We analyze stability by means of a repeated game setting employing simple trigger strategies and we allow a sub-coalition to deviate from the coalitional equilib- rium. For a given form of punishment we are able to rank the stability of different coalition structures as long as the size of the largest coali- tion does not change. Our main results are: (1) singleton regions have the largest incentives to deviate, (2) the stability of cooperation de- pends on the degree of cooperative behavior ex-ante.

Keywords: capital tax competition; tax coordination; coalitional equilibria; repeated game (search for similar items in EconPapers)
JEL-codes: C71 C72 H71 H77 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2012-02
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