The Taxation of Bilateral Trade with Endogenous Information

39 Pages Posted: 27 Jan 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: January 26, 2015

Abstract

This paper analyzes the effects of taxation on information acquisition and bilateral trade in decentralized markets. We show that a profit tax and a transaction tax have opposite implications for equilibrium outcome in bargaining. A marginal increase of a transaction tax increases the incentive to produce private information which creates adverse selection and reduces the probability of trade. In contrast, a marginal increase of a profit tax reduces the incentive to produce information and increases the probability of trade. In markets where there are gains from trade and private information acquisition creates endogenous lemons problems a profit tax dominates a transaction tax.

Keywords: bargaining, information acquisition, taxation, financial transaction tax, funding markets

JEL Classification: C780, D820, D830, G180, H200

Suggested Citation

Dang, Tri Vi and Morath, Florian, The Taxation of Bilateral Trade with Endogenous Information (January 26, 2015). CESifo Working Paper Series No. 5157, Available at SSRN: https://ssrn.com/abstract=2555559

Tri Vi Dang

Columbia University - Department of Economics ( email )

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

Florian Morath (Contact Author)

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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