DP3638 Market Access and Tax Competition

Author(s): Gianmarco Ireo Paolo Ottaviano , Tanguy van Ypersele

Publication Date: November 2002

Keyword(s): tax competition , trade , capital mobility , monopolistic competition

JEL(s): F12 , F22 , H23 , R13 , R23

Programme Areas: International Trade and Regional Economics , Public Policy

Link to this Page: www.cepr.org/pubs/dps/DP3638.asp

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.