Equilibrium leadership in tax competition models with capital ownership: a rejoinder
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This paper reconciles two opposite results in the tax competition literature. Kempf and Rota-Graziosi (J Public Econ 94(9–10):768–776, 2010) and Hindriks and Nishimura (J Public Econ 121:66–68, 2015) have shown that the two Stackelberg outcomes prevail as the subgame perfect equilibria when capital is entirely owned by nonresidents. However, Ogawa (Int Tax Public Finance 20(3):474–484, 2013) has shown that the simultaneous-move outcome prevails when capital is entirely owned by residents. We develop a model in which capital ownership can vary freely between these two polar cases. We show that there exists a unique degree of residential capital ownership such that the equilibrium switches from the Stackelberg to the simultaneous-move outcomes. The chance for the simultaneous-move outcome to prevail increases with the extent of production asymmetry between regions. Partial ownership also induces a novel effect of tax leadership that we call the preference reversion effect.
KeywordsEndogenous timing Tax competition Capital ownership
JEL ClassificationH30 H87 C72
The authors would like to thank the Editor-in-Chief (Ronald Davies) and two anonymous referees for their useful comments and suggestions to our paper. Nishimura acknowledges the financial support from the Grants-in-Aid for Scientific Research (C) (the Ministry of Education, Culture, Sports, Science, and Technology, 24530348, 15K03511) and Strategic Young Researcher Overseas Visits Program for Accelerating Brain Circulation (Japan Society for the Promotion of Science, J2402).