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Hotelling Tax Competition

Author

Listed:
  • Wooders, Myrna

    (Department of Economics, University of Warwick)

  • Zissimos, Ben

    (University of Birmingham)

Abstract
This paper shows how competition among governments for mobile firms can bring about excessive differentiation in levels of taxation and public good provision. Hotelling’s Principle of Minimum Differentiation is applied in the context of tax competition and shown to be invalid. Instead, when an equilibrium exists, differentiation of public good provision is maximized. Non-existence of equilibrium, which can occur, is a metaphor for intense tax competition. The paper also shows that, to some extent, perfect tax discrimination presents a solution to the existence problem created by Hotelling tax competition, but that the efficiency problem of Hotelling tax competition is exacerbated.

Suggested Citation

  • Wooders, Myrna & Zissimos, Ben, 2003. "Hotelling Tax Competition," The Warwick Economics Research Paper Series (TWERPS) 668, University of Warwick, Department of Economics.
    • Handle: RePEc:wrk:warwec:668
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    File URL: https://warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/twerp668.pdf
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    References listed on IDEAS

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    3. Dembour, Carole & Wauthy, Xavier, 2009. "Investment in public infrastructure with spillovers and tax competition between contiguous regions," Regional Science and Urban Economics, Elsevier, vol. 39(6), pages 679-687, November.
    4. Hiroshi Aiura & Yasuo Sanjo, 2010. "Privatization of local public hospitals: effect on budget, medical service quality, and social welfare," International Journal of Health Economics and Management, Springer, vol. 10(3), pages 275-299, September.
    5. Redoano, Michela, 2003. "Fiscal Interactions Among European Countries," Economic Research Papers 269564, University of Warwick - Department of Economics.
    6. C. Dembour, 2008. "Competition for Business Location: A Survey," Journal of Industry, Competition and Trade, Springer, vol. 8(2), pages 89-111, June.

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