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Hotelling Tax Competition

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  • Wooders, Myrna
  • Zissimos, Ben

Abstract

This paper shows how competition among governments for mobile firms can bring about excessive differentiation in levels of taxation and public good provision. Hotelling’s Principle of Minimum Differentiation is applied in the context of tax competition and shown to be invalid. Instead, when an equilibrium exists, differentiation of public good provision is maximized. Non-existence of equilibrium, which can occur, is a metaphor for intense tax competition. The paper also shows that, to some extent, perfect tax discrimination presents a solution to the existence problem created by Hotelling tax competition, but that the efficiency problem of Hotelling tax competition is exacerbated.

Suggested Citation

  • Wooders, Myrna & Zissimos, Ben, 2003. "Hotelling Tax Competition," Economic Research Papers 269481, University of Warwick - Department of Economics.
    • Handle: RePEc:ags:uwarer:269481
    DOI: 10.22004/ag.econ.269481
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    4. Redoano, Michela, 2003. "Fiscal Interactions Among European Countries," Economic Research Papers 269564, University of Warwick - Department of Economics.
    5. Hiroshi Aiura & Yasuo Sanjo, 2010. "Privatization of local public hospitals: effect on budget, medical service quality, and social welfare," International Journal of Health Economics and Management, Springer, vol. 10(3), pages 275-299, September.
    6. C. Dembour, 2008. "Competition for Business Location: A Survey," Journal of Industry, Competition and Trade, Springer, vol. 8(2), pages 89-111, June.

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