The Taxation of Bilateral Trade with Endogenous Information

Working Paper of the Max Planck Institute for Tax Law and Public Finance No. 2013-07

42 Pages Posted: 30 Nov 2013 Last revised: 24 Jun 2015

See all articles by Tri Vi Dang

Tri Vi Dang

Columbia University - Department of Economics

Florian Morath

Department of Public Finance, University of Innsbruck; Max Planck Institute for Tax Law and Public Finance

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Date Written: November 29, 2013

Abstract

This paper analyzes the effects of taxation on trade in a decentralized market. We show that a tax on profits and a transaction tax have opposite implications for information acquisition and trade in the canonical take-it-and-leave-it offer bargaining model. A (marginal) increase of a transaction tax can lead to more information production and lower the probability of efficient trade. In contrast, a (marginal) increase of a profit tax can reduce the incentive to produce information and increase the probability of efficient trade. The taxation of profits can be efficiency enhancing when information is endogenous, while it has no effect when private information is exogenous.

Keywords: Bargaining; Information Acquisition; Taxation; Financial Transaction Tax; Funding Markets

JEL Classification: C78; D82; D83; G18; H20

Suggested Citation

Dang, Tri Vi and Morath, Florian, The Taxation of Bilateral Trade with Endogenous Information (November 29, 2013). Working Paper of the Max Planck Institute for Tax Law and Public Finance No. 2013-07, Available at SSRN: https://ssrn.com/abstract=2361365 or http://dx.doi.org/10.2139/ssrn.2361365

Tri Vi Dang (Contact Author)

Columbia University - Department of Economics ( email )

420 West 118th Street
New York, NY 10027
United States

Florian Morath

Department of Public Finance, University of Innsbruck ( email )

Max Planck Institute for Tax Law and Public Finance ( email )

Marstallplatz 1
Munich, 80539
Germany

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