Increasing Returns in a Standard Tax Competition Model

The standard tax competition literature predicts a race to the bottom in capital tax rates as capital mobility increases. Recently, the very different modeling framework of the new economic geography literature has produced the contrasting result that economic integration leads to agglomeration rents to capital which can be taxed away, in turn leading to higher corporate taxation. This paper incorporates increasing returns directly into the standard tax competition modeling framework to identify the origin of this disparity of results. The model illustrates that increasing returns reduce traditional tax competition pressures as capital mobility increases, and that changes in preferences for the public good, combined with increasing cross-border ownership of capital, and thus taxexporting incentives, are the main factors driving tax rates higher. Tax exporting has not previously been linked endogenously to capital mobility in standard tax competition models or new economic geography models.Tax competition; Capital mobility; Economic Geography; Increasing Returns; Tax Exporting.

Education, Income Distribution and Growth: The Local Connection

This paper develops a simple model of human capital accumulation and community formation by heterogeneous families, which provides an integrated framework for analyzing the local determinants of inequality and growth. Five main conclusions emerge. First, minor differences in education technologies, preferences, or wealth can lead to a high degree of stratification. Imperfect capital markets are not necessary, but will compound these other sources. Second, stratification makes inequality in education and income more persistent across generations. Whether or not the same is true of inequality in total wealth depends on the ability of the rich to appropriate the rents created by their secession. Third, the polarization of urban areas resulting from individual residential decisions can be quite inefficient, both from the point of view of aggregate growth and in the Pareto sense, especially in the long run. Fourth, when state-wide equalization of school expenditures is insufficient to reduce stratification, it may improve educational achievement in poor communities much less than it lowers it in richer communities; thus average academic performance and income growth both fall. Yet it may still be possible for education policy to improve both equity and efficiency. Fifth, because of the cumulative nature of the stratification process, it is likely to be much harder to reverse once it has run its course than to arrest it at an early stage.

Market Integration and Market Concentration in Horizontally Differentiated Industries

This paper derives the impact of market integration on equilibrium firm size and market concentration in horizontally differentiated industries. We show that market concentration (measured by the number of firms) can rise as a consequence of market integration if firms engage in R&D competition. We also demonstrate that whether concentration occurs or not depends on the R&D production function and on consumer preferences. This result implies that the welfare effects of market integration are not unambiguously positive.International Trade

Macroprudential policy and bank systemic risk

This paper investigates the effectiveness of macroprudential policy to contain the systemicrisk of European banks between 2000 and 2017. We use a new database (MaPPED) collected by experts at the ECB and national central banks with narrative informationon a broad range of instruments which are tracked over their life cycle. Using a dynamicpanel framework at a monthly frequency we assess the impact of macroprudential tools and their design on the banks’ systemic risk both in the short and the long run. We furthermore decompose the systemic risk measure in an individual bank risk component and a systemic linkage component. This is of particular interest because microprudential policy focuses on the tail risk of an individual bank while macroprudential policy targets systemic risk by addressing the interlinkages and common exposures across banks. In general, the announcements of macroprudential policy actions have a downward effect on bank systemic risk. On average, all banks benefit from macroprudential tools in terms oftheir individual risk. We find that credit growth tools and exposure limits exhibit the most pronounced downward effect on the individual risk component. However, we find evidence for a risk-shifting effect which is more pronounced for retail-oriented banks. The effects are heterogeneous across banks with respect to the systemic linkage component. Liquidity tools and measures aimed at increasing the resilience of banks decrease the systemic linkage of banks. Moreover, these tools appear to be most effective for distressed banks.Our results have implications for the optimal design of macroprudential instruments

What do Theories of Tax Competition Predict for Capital Taxes in EU Countries? A Review of the Tax Competition Literature

The paper reviews the theoretical literature on capital tax competition relevant for capital taxation in the European Union. The basic tax competition model a la Zodrow and Mierzkowski (1986) is presented, and the arguments of the literature are subsequently integrated into the framework of the basic tax competition model. The review includes models of tax competition where countries are assumed large, asymmetric, when there are more than one tax instrument, where there are more than one tax base, when government is assumed self-serving, and where democratic elections and political equilibrium are allowed for. Moreover, the consequences of agglomeration economies for tax competition pressures are reviewed and incorporated into the standard tax competition model.Tax Competition; Capital Taxation; Capital Mobility; European Integration; Agglomeration

Too much R&D? - Vertical differentiation in a model of monopolistic competition

This paper discusses a model of vertical an horizontal product differentiation within the Dixit-Stiglitz framework of monopolistic competition. Firns coompete not only in prices and horizontal attributes of their products, but also in the quality that can be controlled by R&D activities. Based upon te results of a general equilibrium model, intra-sectoral trade and the welfare implications of public intervention in terms of research promotion are considered. The analysis involves a numerical application to ten basic European industries.R&D, Monopolisitc Competition, Product Differentiation

Is Google the next Microsoft? Competition, Welfare and Regulation in Internet Search

Internet search (or perhaps more accurately `web-search') has grown exponentially over the last decade at an even more rapid rate than the Internet itself. Starting from nothing in the 1990s, today search is a multi-billion dollar business. Search engine providers such as Google and Yahoo! have become household names, and the use of a search engine, like use of the Web, is now a part of everyday life. The rapid growth of online search and its growing centrality to the ecology of the Internet raise a variety of questions for economists to answer. Why is the search engine market so concentrated and will it evolve towards monopoly? What are the implications of this concentration for different `participants' (consumers, search engines, advertisers)? Does the fact that search engines act as `information gatekeepers', determining, in effect, what can be found on the web, mean that search deserves particularly close attention from policy-makers? This paper supplies empirical and theoretical material with which to examine many of these questions. In particular, we (a) show that the already large levels of concentration are likely to continue (b) identify the consequences, negative and positive, of this outcome (c) discuss the possible regulatory interventions that policy-makers could utilize to address these

Sorting, Education and Inequality

This paper examines the education literature through the lens of sorting. It argues that how individuals sort across neighborhoods, schools and households (spouses), can have important consequences for the acquisition of human capital and inequality. It discusses the implications of different education finance systems for sorting and analyzes the efficiency and welfare properties of these in static and dynamic frameworks.