A note on equilibrium leadership in tax competition models

This paper reexamines the work of Kempf and Rota-Graziosi (J. Pub. Econ. 94: 768-776, 2010), which shows that leadership by the small region is the risk dominant equilibrium under the endogenous timing game. They obtain this result in a model where the asymmetry among countries translates into different gradients of the demand for capital but identical vertical intercept. In this note, we simply reverse the form of asymmetry by considering different vertical intercepts but identical gradient. The reason is that market power is typically related to the intercept and not to the slope of the demand function. We then show that the large region tax leadership becomes the risk dominant equilibrium and can even become Pareto superior.