Interjurisdictional Spillovers, Decentralized Policymaking and the Elasticity of Capital Supply
14 Pages Posted: 25 Oct 2010
Date Written: October 25, 2010
This paper points to the important role which the elasticity of aggregate capital supply with respect to the net rate of return to capital plays for the efficiency of policymaking in a decentralized economy with mobile capital and spillovers among jurisdictions. In accordance with previous studies, we show that under the assumption of a fixed capital supply (zero capital supply elasticity) the decentralized policy choice is optimal. If the capital supply elasticity is strictly positive, however, capital tax rates are inefficiently low in the decentralized equilibrium.
Keywords: decentralized policymaking, spillovers, capital supply elasticity
JEL Classification: H23, H77, Q58
Suggested Citation: Suggested Citation