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Ad valorem versus per unit taxation: a perspective from price signaling

Author

Listed:
  • Honglin Li

    (School of Business, University of Wisconsin-Madison)

  • Xiaolu Liu

    (Renmin University of China)

Abstract

This paper compares ad valorem and per unit taxation in the context of price signaling. In the model, a taxation designer chooses between ad valorem and per unit taxation to maximize tax revenues, and a monopoly firm, whose product quality can be either high or low, uses price as a quality signal. The analysis shows that, compared to per unit taxation, ad valorem taxation raises the low-quality firm’s mimicking cost and lowers the high-quality firm’s signaling cost. This leads to higher transaction volumes and tax revenues.

Suggested Citation

  • Honglin Li & Xiaolu Liu, 2021. "Ad valorem versus per unit taxation: a perspective from price signaling," Journal of Economics, Springer, vol. 134(1), pages 27-47, September.
    • Handle: RePEc:kap:jeczfn:v:134:y:2021:i:1:d:10.1007_s00712-021-00736-w
    DOI: 10.1007/s00712-021-00736-w
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    References listed on IDEAS

    as
    1. Delipalla, Sofia & Keen, Michael, 1992. "The comparison between ad valorem and specific taxation under imperfect competition," Journal of Public Economics, Elsevier, vol. 49(3), pages 351-367, December.
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    More about this item

    Keywords

    Asymmetric information; Price signal; Ad valorem taxation; Per unit taxation; Product quality;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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