Public Goods and Tax Competition in a Two-Sided Market

Authors


  • We thank an associate editor of the journal and two anonymous referees for useful suggestions. We also thank Anette Boom, Katherine Cuff, Andreas Haufler, Hideo Konishi, Miltiadis Makris, Ben Lockwood, Paschalis Raimondos-Møller, Matthew Nagler, Matthias Wrede, Benjamin Zissimos, and seminar participants at the Copenhagen Business School, Lehigh University, University of Warwick and conference participants at the 2009 Eastern Economic Association meeting, the 2008 Canadian Public Economics Group (CPEG) meeting and the 2008 Conference on Research in Economic Theory and Econometrics (CRETE) for helpful comments and suggestions. Kotsogiannis acknowledges the support provided by the Catalan Government Science Network (Project No. SGR2005-177) and the Spanish Ministry of Education and Science Research Project (SEJ2006-4444). The usual caveat applies.

Abstract

A rather neglected issue in the tax competition literature is the dependence of equilibrium outcomes on the presence of firms and shoppers (two-sided markets). Making use of a model of vertical and horizontal differentiation, within which jurisdictions compete by providing public goods and levying taxes in order to attract firms and shoppers, this paper characterizes the noncooperative equilibrium. It also evaluates the welfare implications for the jurisdictions of a popular policy of tax coordination: The imposition of a minimum tax. It is shown that the interaction of the two markets affects the intensity of tax competition and the degree of optimal vertical differentiation chosen by the competing jurisdictions. Though the noncooperative equilibrium is, as it is typically the case, inefficient such inefficiency is mitigated by the strength of the interaction in the two markets. A minimum tax policy is shown to be effective when the strength of the interaction is weak and ineffective when it is strong.

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