DP3638 Market Access and Tax Competition

Author(s): Gianmarco Ottaviano, Tanguy van Ypersele
Publication Date: November 2002
Keyword(s): capital mobility, monopolistic competition, tax competition, trade
JEL(s): F12, F22, H23, R13, R23
Programme Areas: Public Economics, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3638

In this Paper, we show that with international externalities, different country sizes, imperfect competition and trade costs, tax competition for mobile firms is efficiency enhancing with respect to the free market outcome. Nonetheless, while the latter entails too many firms in the larger country, the former has too many firms in the smaller one. Under both scenarios the resulting inefficiencies in international specialization and trade flows vanish when trade costs are low enough. Otherwise, only international tax coordination can implement the efficient spatial distribution of firms.