Lobbying and Tax Competition in an Oligopolistic Industry: A Reverse Home Market Effect
37 Pages Posted: 9 Apr 2015 Last revised: 22 Jul 2018
Date Written: December 1, 2016
This paper studies international tax competition for an oligopolistic industry with many firms. Each national government sets its tax rate strategically to maximize the weighted sum of residents’ welfare and political contributions by owners of firms as special interest groups. It is shown that, if the governments heavily care about contributions and trade costs are low, the small country attracts a more than proportionate share of firms by setting a lower tax rate. The well-known home market effect, meaning that a country with a larger domestic market attracts a more-than-proportionate share of firms, may be reversed as a result of tax competition played by politically-interested governments.
Keywords: Tax competition, Market size, Reverse home-market effect, Economic geography, Lobbying
JEL Classification: F15, F22, H20, H30
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