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A Corrective Device for Large Heterogeneous Jurisdictions in a Two-Period Economy with Spillover Effects

Received: Jul. 22, 2020    Accepted: Jul. 31, 2020    Published: Aug. 17, 2020
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Abstract

The matching grant (the Pigovian tax) program from a central government to the jurisdictional governments is a strong instrument to solve the problem of an insufficiently provision of local public goods. The under-provision (over-provision) of public goods arises from different kinds of externalities, such as the benefit spillovers and the tax-exporting effect. This study introduces the spillover effect of public goods and the heterogeneity of jurisdictions to the capital tax competition literature using a two-period economy. It is assumed that the central government and the jurisdictional governments play a Stackelberg game with centralised leadership and that there is a unique Stackelberg equilibrium in each period. Meanwhile, the central government and the jurisdictional governments are assumed to be hyperopic and benevolent. A clear result is that the revision of a corrective device used by the central government in the first period to ensure an optimal level of a local public good which is provided by a hyperopic jurisdictional government, significantly depends on the relative size of the income and spill-in effects in the second period. When the income effect is larger than the spill-in effect in the second period, the optimal matching grant rate (the Pigovian tax rate) in the first period from the central government to a more hyperopic jurisdictional government should be increased (decreased). Conversely, when the spill-in effect is larger than the income effect in the second period, the optimal matching grant rate (the Pigovian tax rate) in the first period from the central government to a more hyperopic jurisdictional government should be decreased (increased). The relative size of the two effects, which work in opposite directions, is determined by the tastes and endowments of the jurisdictions, the form of their production functions and the degree of spillovers, among other factors. This result is quite different from the literature.

DOI 10.11648/j.hss.20200804.13
Published in Humanities and Social Sciences ( Volume 8, Issue 4, July 2020 )
Page(s) 117-123
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2024. Published by Science Publishing Group

Keywords

Corrective Device, Spillover, Tax Competition, Heterogeneity

References
[1] Akai, N., Ihori, T., (2002) Central government subsidies to local public goods, Economics of Governance, 3 (3), 227-239.
[2] Akai, N., Sato, M., (2019) The role of matching grants as a commitment device in the federation model with a repeated soft budget setting. Economics of Governance, 20, 23-39.
[3] Barro, R. J., (1979) On the determination of the public debt. Journal of Political Economy, 87 (5), 940-971.
[4] Bjorvatn, K., Schjelderup, G., (2002) Tax competition and international public goods. International Tax and Public Finance, 9 (2), 111-120.
[5] Boadway, R., Pestieau, P., Wildasin, D., (1989) Non-cooperative behavior and efficient provision of public goods. Public Finance/Finances Publiques, 44 (1), 1-7.
[6] Bucovetsky. S., (1991) Asymmetric tax competition. Journal of Urban Economics, 30, 167-181.
[7] Burbidge, J. B., Myers, G. M., (1994) Population mobility and capital tax competition. Regional Science and Urban Economics, 24, 441-459.
[8] Coates, D., (1993) Property tax competition in a repeated game. Regional Science and Urban Economics, 23, 111-119.
[9] DePater, J., and Myers, G. M., (1994) Strategic capital tax competition: a pecuniary externality and a corrective device. Journal of Urban Economics, 36, 66-78.
[10] Hauer, A., and Wooton, I., (1999) Country size and tax competition for foreign direct investment. Journal of Public Economics, 71 (1), 121-139.
[11] Hindriks, J., S., Peralta, and S., Weber, (2008) Competing in taxes and investment under fiscal equalization. Journal of Public Economics, 92 (12), 2392-2402.
[12] Jensen, R., and E. F., Toma, (1991) Debt in a model of tax competition. Regional Science and Urban Economics, 21 (3), 371-392.
[13] Kanbur, R., and Keen, M., (1993) Jeux Sans frontieres: tax competition and tax coordination when countries differ in size. American Economic Review, 83 (4), 877-892.
[14] Kawachi, K., and Ogawa, H., (2006) Further analysis on public-good provision in a repeated-game setting. Finan zArchiv, 62, 339-352.
[15] King, I., McAfee, R., and Welling, L., (1993) Industrial blackmail: dynamic tax competition and public investment. Canadian Journal of Economics, 26 (3), 590-608.
[16] Lee, K., (1997) Tax competition with imperfectly mobile capital. Journal of Urban Economics, 42, 222-242.
[17] Noiset, L., (2003) Is it tax competition or tax exporting? Journal of Urban Economics, 54, 639-647.
[18] Ogawa, H., (2000) Imperfect capital mobility and local government behavior in a two-period economy. Bulletin of Economic research, 52, 151-166.
[19] Ogawa, H., (2006) Tax competition, spillovers, and subsidies. Annals of Regional Science, 40, 849-858.
[20] Ogawa, H., (2007) Strategic taxation on mobile capital with spillover externality. Finanz Archiv, 63, 33-45.
[21] Roberts, R. D., (1992) Government subsidies to private spending on public goods, Public Choice, 74 (2), 133-152.
[22] Wildasin, D. E., (1991) Some rudimentary ‘duopolity’ theory, Regional Science and Urban Economics, 21, 393-421.
[23] Wildasin, D. E., (2003) Fiscal competition in space and time. Journal of Public Economics, 87 (11), 2571-2588.
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  • APA Style

    Tong Yang. (2020). A Corrective Device for Large Heterogeneous Jurisdictions in a Two-Period Economy with Spillover Effects. Humanities and Social Sciences, 8(4), 117-123. https://doi.org/10.11648/j.hss.20200804.13

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    Tong Yang. A Corrective Device for Large Heterogeneous Jurisdictions in a Two-Period Economy with Spillover Effects. Humanit. Soc. Sci. 2020, 8(4), 117-123. doi: 10.11648/j.hss.20200804.13

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    AMA Style

    Tong Yang. A Corrective Device for Large Heterogeneous Jurisdictions in a Two-Period Economy with Spillover Effects. Humanit Soc Sci. 2020;8(4):117-123. doi: 10.11648/j.hss.20200804.13

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  • @article{10.11648/j.hss.20200804.13,
      author = {Tong Yang},
      title = {A Corrective Device for Large Heterogeneous Jurisdictions in a Two-Period Economy with Spillover Effects},
      journal = {Humanities and Social Sciences},
      volume = {8},
      number = {4},
      pages = {117-123},
      doi = {10.11648/j.hss.20200804.13},
      url = {https://doi.org/10.11648/j.hss.20200804.13},
      eprint = {https://download.sciencepg.com/pdf/10.11648.j.hss.20200804.13},
      abstract = {The matching grant (the Pigovian tax) program from a central government to the jurisdictional governments is a strong instrument to solve the problem of an insufficiently provision of local public goods. The under-provision (over-provision) of public goods arises from different kinds of externalities, such as the benefit spillovers and the tax-exporting effect. This study introduces the spillover effect of public goods and the heterogeneity of jurisdictions to the capital tax competition literature using a two-period economy. It is assumed that the central government and the jurisdictional governments play a Stackelberg game with centralised leadership and that there is a unique Stackelberg equilibrium in each period. Meanwhile, the central government and the jurisdictional governments are assumed to be hyperopic and benevolent. A clear result is that the revision of a corrective device used by the central government in the first period to ensure an optimal level of a local public good which is provided by a hyperopic jurisdictional government, significantly depends on the relative size of the income and spill-in effects in the second period. When the income effect is larger than the spill-in effect in the second period, the optimal matching grant rate (the Pigovian tax rate) in the first period from the central government to a more hyperopic jurisdictional government should be increased (decreased). Conversely, when the spill-in effect is larger than the income effect in the second period, the optimal matching grant rate (the Pigovian tax rate) in the first period from the central government to a more hyperopic jurisdictional government should be decreased (increased). The relative size of the two effects, which work in opposite directions, is determined by the tastes and endowments of the jurisdictions, the form of their production functions and the degree of spillovers, among other factors. This result is quite different from the literature.},
     year = {2020}
    }
    

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  • TY  - JOUR
    T1  - A Corrective Device for Large Heterogeneous Jurisdictions in a Two-Period Economy with Spillover Effects
    AU  - Tong Yang
    Y1  - 2020/08/17
    PY  - 2020
    N1  - https://doi.org/10.11648/j.hss.20200804.13
    DO  - 10.11648/j.hss.20200804.13
    T2  - Humanities and Social Sciences
    JF  - Humanities and Social Sciences
    JO  - Humanities and Social Sciences
    SP  - 117
    EP  - 123
    PB  - Science Publishing Group
    SN  - 2330-8184
    UR  - https://doi.org/10.11648/j.hss.20200804.13
    AB  - The matching grant (the Pigovian tax) program from a central government to the jurisdictional governments is a strong instrument to solve the problem of an insufficiently provision of local public goods. The under-provision (over-provision) of public goods arises from different kinds of externalities, such as the benefit spillovers and the tax-exporting effect. This study introduces the spillover effect of public goods and the heterogeneity of jurisdictions to the capital tax competition literature using a two-period economy. It is assumed that the central government and the jurisdictional governments play a Stackelberg game with centralised leadership and that there is a unique Stackelberg equilibrium in each period. Meanwhile, the central government and the jurisdictional governments are assumed to be hyperopic and benevolent. A clear result is that the revision of a corrective device used by the central government in the first period to ensure an optimal level of a local public good which is provided by a hyperopic jurisdictional government, significantly depends on the relative size of the income and spill-in effects in the second period. When the income effect is larger than the spill-in effect in the second period, the optimal matching grant rate (the Pigovian tax rate) in the first period from the central government to a more hyperopic jurisdictional government should be increased (decreased). Conversely, when the spill-in effect is larger than the income effect in the second period, the optimal matching grant rate (the Pigovian tax rate) in the first period from the central government to a more hyperopic jurisdictional government should be decreased (increased). The relative size of the two effects, which work in opposite directions, is determined by the tastes and endowments of the jurisdictions, the form of their production functions and the degree of spillovers, among other factors. This result is quite different from the literature.
    VL  - 8
    IS  - 4
    ER  - 

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Author Information
  • Graduate School of Social Sciences, Hiroshima University, Higashi-Hiroshima, Japan

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