Revenue Sharing, Competitive Balance and the Contest Success Function

This paper investigates revenue sharing in an asymmetric two team contest model of a sports league with Nash behavior of team owners. The innovation of the analysis is that it focuses on the role of the contest success function (CSF). In case of an inelastic talent supply, revenue sharing turns out to worsen competitive balance regardless of the shape of the CSF. For the case of an elastic talent supply, in contrast, the effect of revenue sharing on competitive balance depends on the specification of the CSF. We fully characterize the class of CSFs for which revenue sharing leaves unaltered competitive balance and identify CSFs ensuring that revenue sharing renders the contest closer.Revenue Sharing, Competitive Balance, Contest Success Function

Firms’ Financial Choices and Thin Capitalization Rules under Corporate Tax Competition

Thin capitalization rules have become an important element in the corporate tax systems of developed countries. This paper sets up a model where national and multinational firms choose tax-efficient financial structures and countries compete for multinational firms through statutory tax rates and thin capitalization rules that limit the tax-deductibility of internal debt flows. In a symmetric tax competition equilibrium each country chooses inefficiently low tax rates and inefficiently lax thin capitalization rules. We show that a coordinated tightening of thin capitalization rules benefits both countries, even though it intensifies competition via tax rates. When countries differ in size, the smaller country not only chooses the lower tax rate but also the more lenient thin capitalization rule.thin capitalization, capital structure, tax competition

Corporate Income Taxation of Multinationals in a General Equilibrium Model

This paper contributes to the discussion on Separate Accounting versus Formula Apportionment in the corporate income taxation of multinational enterprises (MNEs). The innovation of the analysis is that we consider a general equilibrium tax competition model with an endogenously determined world interest rate. Under the principle of Separate Accounting, it turns out that corporate tax rates may be inefficiently low or high, while under Formula Apportionment corporate tax rates are always inefficiently low. These results are true independent of whether the number of countries is small or large. They reverse the insights obtained by previous studies under the assumption of an exogenously given world interest rate.corporate income tax, Separate Accounting, Formula Apportionment

Even Small Trade Costs Restore Efficiency in Tax Competition

We introduce transport cost of trade in products into the classical Zodrow and Mieszkowski (1986) model of capital tax competition. It turns out that even small levels of transport cost lead to a complete breakdown of the seminal result, the underprovision of public goods. Instead, there is a symmetric equilibrium with efficient public goods provision in all jurisdictions.tax competition, public goods provision, trade

Tax Evasion and Competition

Using a Cournot oligopoly model with an endogenous number of firms and evasion of indirect taxes, this paper shows that more intense competition may have the negative side-effect of eroding tax revenues by increasing tax evasion. This will be the case if market entry costs decrease. A similar result will hold if marginal production costs fall and demand is either weakly concave or convex and inelastic. The desirable result of more competition, less evasion and higher tax revenues will be obtained if (a) marginal production costs fall and demand is convex and elastic or (b) the demand elasticity increases.competition, firms, market power, tax evasion, tax revenues

Corporate Income Taxation of Multinationals and Fiscal Equalization

This paper investigates the effect of fiscal equalization on the efficiency properties of corporate income tax rates chosen by symmetric countries in a Nash tax competition game under the taxation principles of Separate Accounting and Formula Apportionment. Fiscal equalization ensures efficiency if the marginal transfer just reflects the fiscal and pecuniary externalities of tax rates. In contrast to previous studies, tax base equalization (Representative Tax System) does not satisfy this condition, but combining tax revenue and private income equalization does, regardless of which taxation principle is implemented. Under Formula Apportionment, tax base equalization is superior to tax revenue equalization if the wage income externality is sufficiently large.separate accounting, formula apportionment, fiscal equalization

Interregional Redistribution and Budget Institutions under Asymmetric Information

Empirical evidence from the U.S. and the European Union suggests that regions which contribute to interregional redistribution face weaker borrowing constraints than regions which benefit from interregional redistribution. This paper presents an argument in favor of such differentiated budgetary institutions. It develops a two-period model of a federation consisting of two types of regions. The federal government redistributes from one type of regions (contributors) to the other type (recipients). It is shown that a fiscal constitution with lax budget rules for contributors and strict budget rules for recipients solves the self-selection problem the federal government faces in the presence of asymmetric information regarding exogenous characteristics of the regions.asymmetric information, interregional redistribution, borrowing rules

Interjurisdictional Spillovers, Decentralized Policymaking and the Elasticity of Capital Supply

This paper points to the important role which the elasticity of aggregate capital supply with respect to the net rate of return to capital plays for the efficiency of policymaking in a decentralized economy with mobile capital and spillovers among jurisdictions. In accordance with previous studies, we show that under the assumption of a fixed capital supply (zero capital supply elasticity) the decentralized policy choice is optimal. If the capital supply elasticity is strictly positive, however, capital tax rates are inefficiently low in the decentralized equilibrium.decentralized policymaking, spillovers, capital supply elasticity

Corporate Income Taxation of Multinationals and Fiscal Equalization

This paper investigates the eect of scal equalization on the efficiency properties of corporate income tax rates chosen by symmetric countries in a Nash tax competition game under the taxation principles of Separate Accounting and Formula Apportionment. Fiscal equalization ensures efficiency if the marginal transfer just reects the scal and pecuniary externalities of tax rates. In contrast to previous studies, tax base equalization (Representative Tax System) does not satisfy this condition, but combining tax revenue and private income equalization does, regardless of which taxation principle is implemented. Under Formula Apportionment, tax base equalization is superior to tax revenue equalization if the wage income externality is suffciently large.Separate Accounting, Formula Apportionment, Fiscal Equalization

The Paradoxes of Revenge in Conflicts

We consider a differential game of a conflict between two factions who both have a desire to exact revenge. We show that, in contrast to conventional wisdom, the desire for revenge need not lead to escalation of conflicts. Surprisingly, in the open-loop equilibrium, the weaker faction exerts a higher effort when the stronger faction’s military capability increases. This result is not possible in the absence of a desire for revenge. The closed-loop equilibrium is characterized by a self-deterrence effect: Anticipating the future retaliation of the opponent, a faction has an incentive to exert lower effort today. This strengthens the tendency to a stable steady state and paradoxically may decrease the factions’ effort below the levels exerted in the case without revenge. We discuss some applications of our results and also offer an explanation of a puzzling empirical result obtained by Jaeger and Paserman (2007) in their study of the Israeli-Palestinian conflict. We also discuss the implications of revenge-dependent preferences for welfare economics and their strategic value as commitment devices.conflict, commitment, differential game, revenge