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Endogenizing Government's Objectives in Tax Competition with Capital Ownership

Keisuke Kawachi, Hikaru Ogawa and Taiki Susa
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Keisuke Kawachi: Faculty of Humanities, Law and Economics, Mie University
Taiki Susa: College of Business Administration and Information Science, Chubu University

No CIRJE-F-1054, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

Abstract: In this paper, we extend the standard approach of horizontal tax competition by endogenizing the policy objectives that governments pursue. Following the literature on strategic delegation games, we consider a preplay stage, where jurisdictions commit themselves to act as Leviathan or as benevolent agents. We show that the sub-game perfect equilibria (SPEs) correspond to the three cases of tax competition between (i) the Leviathan and the benevolent government, (ii) both Leviathans, and (iii) both benevolent governments, depending on the form of capital ownership. The results provide grounds for the assumption of government objective made in literature, and explain why some governments behave as Leviathans, while others as benevolent agents in international tax competition.

New Economics Papers: this item is included in nep-pbe and nep-ure
Date: 2017-07
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