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Equalization Payments in a Bargaining Model of Tax Competition

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  • John Leach

Abstract

A model in which a high-productivity region and a low-productivity region bargain with each firm in a group of mobile firms is constructed. It differs from the Han and Leach [7] model in that the firms are identical, so that its comparative statics are more tractable. The model is used to examine the allocative effects of equalization payments (both non-contingent payments and "corrective subsidies"). The equilibrium is characterized by misallocation of capital and underprovision of public goods. Underprovision is more severe in the low-productivity region than the high-productivity region. A transfer of revenue from the high-productivity region to the low-productivity region augments public goods provision in the low-productivity region, allowing that region to make more generous offers to the firms. Likewise, underprovsion becomes more severe in the high-productivity region, so that its offers become less generous. Equilibrium is attained by a movement of firms from the high-productivity region to the low-productivity region, reducing the misallocation of capital.

Suggested Citation

  • John Leach, 2008. "Equalization Payments in a Bargaining Model of Tax Competition," Department of Economics Working Papers 2008-01, McMaster University.
    • Handle: RePEc:mcm:deptwp:2008-01
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    File URL: http://socserv.mcmaster.ca/econ/rsrch/papers/archive/2008-01.pdf
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    References listed on IDEAS

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    1. Han, Seungjin & Leach, John, 2008. "A bargaining model of tax competition," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1122-1141, June.
    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. DePeter James A. & Myers Gordon M., 1994. "Strategic Capital Tax Competition: A Pecuniary Externality and a Corrective Device," Journal of Urban Economics, Elsevier, vol. 36(1), pages 66-78, July.
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    7. Wildasin, David E., 1989. "Interjurisdictional capital mobility: Fiscal externality and a corrective subsidy," Journal of Urban Economics, Elsevier, vol. 25(2), pages 193-212, March.
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    9. 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.
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    Cited by:

    1. Osiris J. Parcero, 2009. "Optimal country's policy towards multinationals when local regions can choose between firm-specific and non-firm-specific policies," Working Papers 2009/34, Institut d'Economia de Barcelona (IEB).
    2. Robin Boadway & Katherine Cuff, 2017. "The impressive contribution of Canadian economists to fiscal federalism theory and policy," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 50(5), pages 1348-1380, December.
    3. Bruno De Borger & Wilfried Pauwels, 2010. "A Nash bargaining solution to models of tax and investment competition: tolls and investment in serial transport corridors," Working Papers 2010/1, Institut d'Economia de Barcelona (IEB).

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