Reference : Is a dynamic approach to tax games relevant?
Scientific journals : Article
Business & economic sciences : Quantitative methods in economics & management
Is a dynamic approach to tax games relevant?
Paulus, Nora mailto [University of Trier]
Pieretti, Patrice mailto [University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > >]
Zou, Benteng mailto [University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Department of Economics and Management (DEM) >]
Annals of Economics and statistics
[en] differential game ; dynamic tax competition ; Markovian Nash Equilibrium
[en] In this paper, we argue that static models provide an incomplete analysis of interjurisdictional tax competition. Accordingly, one can doubt whether a one-shot view is suitable for analyzing real world tax competition.
Contrary to previous contributions in tax competition, we are able to model the interplay between changing tax rates and sluggish factor adjustments. We demonstrate that the intensity of tax competition is impacted by the temporal nature of the game. The commitment of governments to stick to their tax policies for a given period (open-loop behavior) leads to less intense competition relative to a static approach. If the policymakers continuously update their tax rates (Markovian
behavior), competition is fiercer than in a static game, except for the case where capital adjustment is relatively sluggish and the governments' marginal valuation of public goods is high enough.

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