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A note on Kanbur and Keen : transfers to sustain fiscal cooperation

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  • VERDONCK, Magali

Abstract

We analyze the two-country model of fiscal competition of Kanbur and Keen (1993) where countries differ in size and use a commodity tax to reach their objective of revenue maximization. Due to fiscal externalities, the non-cooperative outcome is inefficient. Besides, the international optimum could be individually irrational for the smaller country compared to the non-cooperative equilibrium. The purpose of this paper is to examine whether the international optimum can be reached and sustained by means of financial transfers between the countries as suggested in another context by Chander and Tulkens (1995, 1997). We show that with transfers of a specific form internationally optimal fiscal cooperation is indeed individually rational for both countries and, in that sense, sustainable. Furthermore, we show that these transfers can be such that the optimal outcome is, under some conditions, a dominant strategy for both countries.

Suggested Citation

  • VERDONCK, Magali, 2004. "A note on Kanbur and Keen : transfers to sustain fiscal cooperation," LIDAM Discussion Papers CORE 2004002, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2004002
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    References listed on IDEAS

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    1. Parkash Chander & Henry Tulkens, 2006. "The Core of an Economy with Multilateral Environmental Externalities," Springer Books, in: Parkash Chander & Jacques Drèze & C. Knox Lovell & Jack Mintz (ed.), Public goods, environmental externalities and fiscal competition, chapter 0, pages 153-175, Springer.
    2. Sam Bucovetsky & Michael Smart, 2006. "The Efficiency Consequences of Local Revenue Equalization: Tax Competition and Tax Distortions," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 8(1), pages 119-144, January.
    3. Robin W. Boadway & Frank R. Flatters, 1982. "Efficiency and Equalization Payments in a Federal System of Government: A Synthesis and Extension of Recent Results," Canadian Journal of Economics, Canadian Economics Association, vol. 15(4), pages 613-633, November.
    4. Carlo Carraro & Vito Fragnelli (ed.), 2004. "Game Practice and the Environment," Books, Edward Elgar Publishing, number 3344.
    5. Kanbur, Ravi & Keen, Michael, 1993. "Jeux Sans Frontieres: Tax Competition and Tax Coordination When Countries Differ in Size," American Economic Review, American Economic Association, vol. 83(4), pages 877-892, September.
    6. Charles Figuieres & Jean Hindriks & Gareth D. Myles, 2004. "Revenue Sharing versus Expenditure Sharing in a Federal System," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(2), pages 155-174, March.
    7. Haufler,Andreas, 2008. "Taxation in a Global Economy," Cambridge Books, Cambridge University Press, number 9780521047593, October.
    8. CURRARINI , Sergio & TULKENS, Henry, 2004. "Stable international agreements on transfrontier pollution with ratification constraints," LIDAM Reprints CORE 1715, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    9. Kanbur, Ravi & Keen, Michael, 1991. "Tax competition and tax coordination : when countries differ in size," Policy Research Working Paper Series 738, The World Bank.
    10. repec:cor:louvrp:-1715 is not listed on IDEAS
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    Cited by:

    1. Rinaldi, Gustavo, 2007. "The use of economic tools to develop a consensus on alcohol policies within and between jurisdictions," MPRA Paper 21941, University Library of Munich, Germany, revised 18 Apr 2007.

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    More about this item

    Keywords

    Indirect Taxation; Asymmetric Countries; Tax Competition; Transfers; Cooperation; Nash Equilibrium;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects

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