Public Goods and Tax Competition in a Two-Sided Market

36 Pages Posted: 9 Sep 2008

Date Written: September 9, 2008

Abstract

A rather neglected issue in the tax competition literature is the dependence of equilibrium outcomes on the presence of firms and shoppers (two-sided markets). Making use of a model of vertical and horizontal differentiation, within which jurisdictions compete by providing public goods and levying taxes in order to attract firms and shoppers, this paper characterizes the non-cooperative equilibrium. It also evaluates the welfare implications for the jurisdictions of a popular policy of tax coordination: The imposition of a minimum tax. It is shown that the interaction of the two markets affects the intensity of tax competition and the degree of optimal vertical differentiation chosen by the competing jurisdictions. Though the non-cooperative equilibrium is, as it is typically the case, inefficient such inefficiency is mitigated by the strength of the interaction in the two markets. A minimum tax policy is shown to be effective when the strength of the interaction is weak and ineffective when it is strong.

Keywords: Public goods, Tax competition, Two-Sided Market, Vertical Differentiation

Suggested Citation

Kotsogiannis, Christos and Serfes, Konstantinos, Public Goods and Tax Competition in a Two-Sided Market (September 9, 2008). Available at SSRN: https://ssrn.com/abstract=1265539 or http://dx.doi.org/10.2139/ssrn.1265539

Christos Kotsogiannis

University of Exeter ( email )

Exeter EX4 4QX, Devon
United Kingdom

Konstantinos Serfes (Contact Author)

Drexel University ( email )

3220 Market Street
Philadelphia, PA 19104
United States
215-895-6816 (Phone)
215-571-4670 (Fax)

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