Stability and welfare effects of profit taxes within an evolutionary market interaction model

Noemi Schmitt, Jan Tuinstra and Frank Westerhoff

No 122, BERG Working Paper Series from Bamberg University, Bamberg Economic Research Group

Abstract: We develop a partial equilibrium model in which firms can locate in two separate regions. A firm's decision where to locate in a given period depends on the regions' relative profitability. If firms react strongly to the regions' relative profitability, their market switching behavior generates unstable dynamics. If the goal of policy makers is to stabilize these dynamics they can do so by introducing profit taxes that reduce the regions' relative profitability. While stability can already be obtained by imposing profit taxes in one of the two regions, total welfare is maximized if policy makers coordinate their tax setting behavior across regions. However, policy makers only interested in welfare in their own region may have the incentive to decrease their profit tax below this level, thereby attracting more firms and increasing tax revenues, at the cost of instability in both regions.

Keywords: market interactions; evolutionary dynamics; profit taxes; policy coordination; welfare effects; stability analysis (search for similar items in EconPapers)
JEL-codes: D83 E30 H20 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-bec, nep-evo, nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Journal Article: Stability and welfare effects of profit taxes within an evolutionary market interaction model (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bamber:122

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