Tax Competition with Heterogeneous Firms

Richard E. Baldwin, Toshihiro Okubo

Research output: Contribution to journalArticle

7 Citations (Scopus)

Abstract

This paper studies tax competition in an economic geography model that allows for agglomeration economies with trade costs and heterogeneous firms. We find that the Nash equilibrium involves a large country charging a higher tax than a small nation. Lower trade costs lead to an intensification of competition, a drop in Nash tax rates and a narrowing of the gap. Since large, productive firms are naturally more sensitive to tax differences in our model, large firms are the crux of tax competition in our model. This also means that tax competition has consequences for the average productivity of big and small nations' industries; by lowering tax rates, a small nation can attract high-productivity firms.

Original languageEnglish
JournalSpatial Economic Analysis
DOIs
Publication statusAccepted/In press - 2014

Fingerprint

Tax
taxes
firm
Productivity
productivity
Agglomeration
Geography
economic geography
Costs
costs
Business
tax
Tax competition
Heterogeneous firms
agglomeration
cost
Nash Equilibrium
agglomeration area
Model
Economics

Keywords

  • average productivity
  • Firm heterogeneity
  • Nash equilibrium tax
  • spatial sorting
  • tax cooperation

ASJC Scopus subject areas

  • Statistics, Probability and Uncertainty
  • Earth and Planetary Sciences (miscellaneous)
  • Geography, Planning and Development
  • Economics, Econometrics and Finance(all)

Cite this

Tax Competition with Heterogeneous Firms. / Baldwin, Richard E.; Okubo, Toshihiro.

In: Spatial Economic Analysis, 2014.

Research output: Contribution to journalArticle

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