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Increasing Returns, Learning, and Beneficial Tax Competition

Seppo Honkapohja () and Arja Turunen-Red
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Arja Turunen-Red: University of New Orleans

No 2005-09, Working Papers from University of New Orleans, Department of Economics and Finance

Abstract: We analyze the welfare impact of entrepreneur mobility in a two-country model. Increasing returns in production yield multiple equilibria that are stable under adaptive learning. Governments compete for the mobile resource by setting income taxes. We show that large welfare gains can arise from noncooperative taxation. If expectational barriers prevent the realization of high output equilibria, tax competition can sufficiently perturb expectations so that high steady states become attainable. Once in a high production regime, governments may institute cooperative tax increases or reductions so as to bring the economy to the global joint optimum without disturbing the regime.

Keywords: Competition for mobile factors; Overlapping generations; Multiple equilibria; Bifurcations (search for similar items in EconPapers)
JEL-codes: H2 F2 D83 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe
Date: 2005-11
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Journal Article: Increasing Returns, Learning, and Beneficial Tax Competition (2007) Downloads
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