Stability and welfare effects of profit taxes within an evolutionary market interaction model

Arbeitspapier

We develop a partial equilibrium model in which firms can locate in two separate regions. A firm's decision where to locate in a given period depends on the regions' relative profitability. If firms react strongly to the regions' relative profitability, their market switching behavior generates unstable dynamics. If the goal of policy makers is to stabilize these dynamics they can do so by introducing profit taxes that reduce the regions' relative profitability. While stability can already be obtained by imposing profit taxes in one of the two regions, total welfare is maximized if policy makers coordinate their tax setting behavior across regions. However, policy makers only interested in welfare in their own region may have the incentive to decrease their profit tax below this level, thereby attracting more firms and increasing tax revenues, at the cost of instability in both regions.

Object Details

• ISBN: 978-3-943153-42-2
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: BERG Working Paper Series ; No. 122

Classification and Topics

• Classification: Wirtschaft ; Search; Learning; Information and Knowledge; Communication; Belief; Unawareness ; Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data) ; Taxation, Subsidies, and Revenue: General
• Subject: market interactions ; evolutionary dynamics ; profit taxes ; policy coordination ; welfare effects ; stability analysis

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Schmitt, Noemi ; Tuinstra, Jan ; Westerhoff, Frank
• Event: Veröffentlichung
• (who): Bamberg University, Bamberg Economic Research Group (BERG)
• (where): Bamberg
• (when): 2017

Further information

• Handle: http://hdl.handle.net/10419/161629
• Last update: 10.03.2025, 11:45 AM CET