Tax Policy When Countries Compete for Third Market Exports

21 Pages Posted: 22 Dec 2012

Date Written: December 2012


We examine the welfare and other consequences of tax policy in a third market export model where duopolists located in two countries compete in prices. With tax competition between governments, we allow for welfare‐maximizing governments in the two countries to delegate tax setting responsibility to policy‐makers who have different objectives than the governments. The unique equilibrium in the tax competition environment involves both governments delegating tax setting responsibility to tax revenue‐maximizing policy‐makers. This equilibrium yields higher welfare for both countries than the outcome when the governments delegate to welfare‐maximizing policy‐makers. The paper also compares tax competition with tax harmonization and shows that when the entire export market is served, tax harmonization improves the welfare of the country that houses the low cost firm, while the other country may be immiserized.

Suggested Citation

Mohan, Vijay, Tax Policy When Countries Compete for Third Market Exports (December 2012). Pacific Economic Review, Vol. 17, Issue 5, pp. 708-728, 2012, Available at SSRN: or

Vijay Mohan (Contact Author)

RMIT University ( email )

124 La Trobe Street
Melbourne, 3000

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