TY - JOUR
T1 - Tax discrimination against inter-firm networks
AU - Itoh, Ryo
N1 - Funding Information:
The author thanks Toshimori Otazawa, Daisuke Oyama, Kentaro Nakajima, Takanori Adachi, Makoto Hanazono, Tomoya Mori, Seil Mun, Yasusada Murata, Hikaru Ogawa, Ryosuke Okamoto, Takatoshi Tabuchi, Yves Zenou and two anonymous referees of this journal for their helpful comments. The author also acknowledges the financial support from Grant-in-Aid for JSPS Fellows No. 24730216 and 23330095 .
Publisher Copyright:
© 2014.
PY - 2014/8/13
Y1 - 2014/8/13
N2 - The purpose of this study is to investigate how local and central governments utilize inter-firm transaction network information for corporate tax discrimination. We assume a two-stage game with two asymmetric emerging regional markets and no prior investors. First, governments offer a different tax level to each firm. Next, firms embedded in a fixed transaction network choose a region in which to invest, prompted by the incentive of co-locating with their direct transaction partners. The game is played with incomplete information on the stand-alone payoffs of other firms. First, we find that when two competitive regional governments play the first stage to maximize their tax revenue, they both propose lower tax levels to firms with more direct partners. Second, when the central government plays the game to maximize social welfare, it offers a tax incentive to concentrate firms in the advantageous region. In addition, this tax incentive is greater for firms that have a higher Katz-Bonacich centrality. Furthermore, when a uniform tax is the only practical option for the central government, the level of the uniform tax depends on the average value and variance of the Katz-Bonacich centrality of the network.
AB - The purpose of this study is to investigate how local and central governments utilize inter-firm transaction network information for corporate tax discrimination. We assume a two-stage game with two asymmetric emerging regional markets and no prior investors. First, governments offer a different tax level to each firm. Next, firms embedded in a fixed transaction network choose a region in which to invest, prompted by the incentive of co-locating with their direct transaction partners. The game is played with incomplete information on the stand-alone payoffs of other firms. First, we find that when two competitive regional governments play the first stage to maximize their tax revenue, they both propose lower tax levels to firms with more direct partners. Second, when the central government plays the game to maximize social welfare, it offers a tax incentive to concentrate firms in the advantageous region. In addition, this tax incentive is greater for firms that have a higher Katz-Bonacich centrality. Furthermore, when a uniform tax is the only practical option for the central government, the level of the uniform tax depends on the average value and variance of the Katz-Bonacich centrality of the network.
KW - Discriminatory tax
KW - Inter-firm transaction network
KW - Katz-Bonacich centrality
KW - Location choice
KW - Network externality
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U2 - 10.1016/j.regsciurbeco.2014.07.011
DO - 10.1016/j.regsciurbeco.2014.07.011
M3 - Article
AN - SCOPUS:84907564953
VL - 49
SP - 25
EP - 35
JO - Regional Science and Urban Economics
JF - Regional Science and Urban Economics
SN - 0166-0462
ER -