Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/161629
Authors: 
Schmitt, Noemi
Tuinstra, Jan
Westerhoff, Frank
Year of Publication: 
2017
Series/Report no.: 
BERG Working Paper Series 122
Abstract: 
We develop a partial equilibrium model in which firms can locate in two separate regions. A firm's decision where to locate in a given period depends on the regions' relative profitability. If firms react strongly to the regions' relative profitability, their market switching behavior generates unstable dynamics. If the goal of policy makers is to stabilize these dynamics they can do so by introducing profit taxes that reduce the regions' relative profitability. While stability can already be obtained by imposing profit taxes in one of the two regions, total welfare is maximized if policy makers coordinate their tax setting behavior across regions. However, policy makers only interested in welfare in their own region may have the incentive to decrease their profit tax below this level, thereby attracting more firms and increasing tax revenues, at the cost of instability in both regions.
Subjects: 
market interactions
evolutionary dynamics
profit taxes
policy coordination
welfare effects
stability analysis
JEL: 
D83
E30
H20
ISBN: 
978-3-943153-42-2
Document Type: 
Working Paper

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