Imperfect Competition and Optimal Taxation

49 Pages Posted: 10 Jul 2013

See all articles by Andrea Colciago

Andrea Colciago

De Nederlandsche Bank - Research Department; Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS); Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

Date Written: July 9, 2013

Abstract

This paper provides optimal labor and dividend income taxation in a general equilibrium model with oligopolistic competition and endogenous firms' entry. In the long run the optimal dividend income tax corrects for inefficient entry. The dividend income tax depends on the form of competition and nature of the sunk entry costs. In particular, it is higher in market structures characterized by competition in quantities with respect to those characterized by price competition. Oligopolistic competition leads to an endogenous countercyclical price markup. As a result offsetting the distortions over the business cycle requires deviations from full tax smoothing.

Keywords: Firms' Entry, Market Stuctures, Market Distortions, Optimal Dividend Income Tax

JEL Classification: E62, L13

Suggested Citation

Colciago, Andrea, Imperfect Competition and Optimal Taxation (July 9, 2013). De Nederlandsche Bank Working Paper No. 383, Available at SSRN: https://ssrn.com/abstract=2291901 or http://dx.doi.org/10.2139/ssrn.2291901

Andrea Colciago (Contact Author)

De Nederlandsche Bank - Research Department ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

U6 Building
Viale Piero e Alberto Pirelli, 22
Milano, 20126
Italy

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