Endogenous capital supply and equilibrium leadership in tax competition

In this paper, we reconsider the leadership of tax competition, focusing on a situation where total amount of capital competed by countries is endogenously determined. Specifically, we model a timing game under asymmetric tax competition, in which capital is supplied not only by the residents of two...

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Bibliographic Details
Published in:International review of economics & finance 2020-11, Vol.70, p.622-634
Main Authors: Kawachi, Keisuke, Ogawa, Hikaru, Susa, Taiki
Format: Article
Language:English
Subjects:
Capital supply
Endogenous timing
Market access
Tax competition
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Summary:In this paper, we reconsider the leadership of tax competition, focusing on a situation where total amount of capital competed by countries is endogenously determined. Specifically, we model a timing game under asymmetric tax competition, in which capital is supplied not only by the residents of two countries, but also by investors outside these countries. The results show that, when the capital market becomes more accessible for outside investors, sequential-move equilibria are more likely to be realized, in which one country leads and the other follows. Conversely, only a simultaneous-move equilibrium emerges when the openness of the market is sufficiently small. These results are reversed when governments compete in public investment rather than tax.
ISSN:1059-0560
1873-8036
DOI:10.1016/j.iref.2020.06.031