SUMMARY PAPER – Fiscal competition
CASSANO Giandonato
ID: 0100883614
Teachers
Pierre PICARD
Thi Thu Huyen TRAN
1st text:
Existence of Nash equilibria in fiscal competition models
Didier Laussel*, Michel Le Breton (Regional Science and Urban Economics 28 (1998) 283–296)
The fiscal competition game was introduced by Wildasin (1988) who characterizes the set of Nash equilibria which are, under certain assumptions, unique or associated with a zero-net return on capital.
Two jurisdictions, represented by a household, compete for attracting capital because it implies high income for the household and furthermore, the level of public expenditures increases if high investments are taxed.
Capital is perfectly mobile and, obviously,
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Laussel and M. Le Breton found 2 consistent with Waldasin:
i) Partial equilibrium: where capital owner owners not present in the model absorb all capital income’’ (Wildasin (1988), p. 235) ii) General equilibrium where there is no absentee of capital owners but there is in each jurisdiction an absolute majority of households who don’t have capital endowment, but choose the values of tax on capital, tax on labor and public good provision to maximize their welfare.
In the subgame perfect Nash equilibria, we assume that the total amount of capital is constant and there is a continuum of capital owners.
In a first stage, the two jurisdictions choose simultaneously their respective tax rates, then in a second stage, the capital owners decide (given tax rates and income rates) between invest in one of the two jurisdictions by getting the corresponding net return or not invest all and getting 0.
So, the payoff of capital owners is equal to the net return of his capital.
The payoff of each jurisdiction is the sum of income and capital tax.
Finally, this paper suggests that Nash equilibria always exist:
1-) A unique Nash
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Wildasin (Journal of Public Economics)
Here we have two complementary imperfectly mobile factors of production: labor and capital.
A tax/subsidy will depress/rise the gross and net return to the other at all times after the beginning of the policy change: simultaneous dynamic adjustment.
-) In the static setting, cross-effects increase if factors of production are complements or substitutes: favourable treatment for one factor increases the equilibrium employment of the other.
-) For the dynamic model, thanks to the variational equations (“see Boadway 1979”) we observe that:
i) An increase in the net tax burden on any mobile resource decreases its long-run equilibrium level ii) An increase in the net tax burden on a mobile resource reduces/increases the long-run equilibrium level of the other mobile factor if the two inputs are complements/substitutes in the production process iii) The long-run equilibrium depends only by production technology and not by adjustment costs.
The incidence of the tax during the transition to a new steady state depends on whether factors are complements, substitutes, or independents in
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