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Product Diversity, Demand Structures and Optimal Taxation

Roland Winkler () and Vivien Lewis ()

VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy from Verein für Socialpolitik / German Economic Association

Abstract: This paper studies optimal taxation in a general equilibrium macro model with endogenous entry. We compare the constant elasticity of substitution (CES) model to three alternative demand structures: oligopolistic competition in prices, oligopolistic competition in quantities, and translog preferences. Our economy is characterized by two distortions: a labor distortion due to the misalignment of markups on goods and leisure, and an entry distortion due to the misalignment of the consumer surplus effect and the profit destruction effect of entry. The two distortions interact in determining the wedge between the market-driven and optimal level of product diversity. We show how optimal labor and entry taxes depend upon the prevailing demand structure, the nature and size of entry costs, and the degree of substitutability between goods.

JEL-codes: E22 E61 H21 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
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Related works:
Journal Article: PRODUCT DIVERSITY, DEMAND STRUCTURES, AND OPTIMAL TAXATION (2015) Downloads
Working Paper: Product diversity, demand structures and optimal taxation (2013) Downloads
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