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And the tax winner is ... A note on endogenous timing in the commodity taxation race

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Abstract

This note investigates the endogenous choice of leadership in commodity tax competition. We apply an endogenous timing game, where jurisdictions commit themselves to lead or to follow, to the Kanbur and Keen (1993) model. We show that the Subgame Pefect Nash Equilibria (SPNE) correspond to the two Stackelberg situations, yielding to a coordination issue. Selecting an equilibrium by means of the risk-dominance criterion, we prove that the smaller country has to lead. If asymmetry among countries is sufficient Pareto-dominance reinforces risk-dominance in selecting the same SPE. We deduce two important results for the literature of tax competition: when countries differ sufficiently by their size, the "big-country-higher-tax" rule does not hold anymore; when countries are close in size, tax harmonization through a unique tax rate among countries occurs without any international agreement

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  • Hubert Kempf & Grégoire Rota-Graziosi, 2010. "And the tax winner is ... A note on endogenous timing in the commodity taxation race," Documents de travail du Centre d'Economie de la Sorbonne 10038, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    • Handle: RePEc:mse:cesdoc:10038
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    Keywords

    Commitment; commodity tax competition; strategic complements; Stackelberg Equilibrium; Pareto dominance; risk dominance;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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