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Journal Article

And the Tax Winner Is… Endogenous Timing in the Commodity Taxation Race

Hubert Kempf and Grégoire Rota-Graziosi
Annals of Economics and Statistics
No. 113/114, SPECIAL ISSUE ON THE ECONOMICS OF TAXATION (June 2014), pp. 67-79
Published by: GENES on behalf of ADRES
DOI: 10.15609/annaeconstat2009.113-114.67
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Page Count: 13
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And the Tax Winner Is… Endogenous Timing in the Commodity Taxation Race
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We investigate 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. The Subgame Perfect 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. When countries sufficiently differ in size, both countries set the same tax rate at the risk dominant equilibrium; when they are close in size, the larger country exploits its second-mover advantage by setting a lower tax rate than the small one. In either case, the “ bigger-country-higher-tax-rate” rule does not hold anymore. JEL: C72, H30, H87. / KEY WORDS: Commitment, Commodity Tax Competition, Strategic Complements, Stackelberg Equilibrium, Pareto Dominance, Risk Dominance.

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