A Note on Kanbur and Keen: Transfers to Sustain Fiscal Cooperation

CORE Discussion Paper No. 2004/2

16 Pages Posted: 16 Aug 2005

See all articles by Magali Verdonck

Magali Verdonck

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE)

Date Written: January 2004

Abstract

We analyze the two-country model of fiscal competition of Kanbur and Keen (1993) where countries differ in size and use a commodity tax to reach their objective of revenue maximization. Due to fiscal externalities, the non-cooperative outcome is inefficient. Besides, the international optimum could be individually irrational for the smaller country compared to the non-cooperative equilibrium. The purpose of this paper is to examine whether the international optimum can be reached and sustained by means of financial transfers between the countries as suggested in another context by Chander and Tulkens (1995, 1997). We show that with transfers of a specific form internationally optimal fiscal cooperation is indeed individually rational for both countries and, in that sense, sustainable. Furthermore, we show that these transfers can be such that the optimal outcome is, under some conditions, a dominant strategy for both countries.

Keywords: Indirect Taxation, Asymmetric Countries, Tax Competition, Transfers, Cooperation, Nash Equilibrium

JEL Classification: H23, H26, H3, H73

Suggested Citation

Verdonck, Magali, A Note on Kanbur and Keen: Transfers to Sustain Fiscal Cooperation (January 2004). CORE Discussion Paper No. 2004/2, Available at SSRN: https://ssrn.com/abstract=779086 or http://dx.doi.org/10.2139/ssrn.779086

Magali Verdonck (Contact Author)

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium