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Ad valorem versus unit taxes: Monopolistic competition, heterogeneous firms, and intra-industry reallocations

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Ad valorem versus unit taxes : Monopolistic competition, heterogeneous firms, and intra-industry reallocations. / Schröder, Philipp J.H.; Sørensen, Allan.

In: Journal of Economics, Vol. 101, No. 3, 2010, p. 247-265.

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@article{e4080bb0ebfd11df9bfe000ea68e967b,
title = "Ad valorem versus unit taxes: Monopolistic competition, heterogeneous firms, and intra-industry reallocations",
abstract = "Real-world industries are composed from heterogeneous firms and substantial intra-industry reallocations take place, i.e. high productivity firms squeeze out low productivity firms. Previous tax-tool comparisons have not included these central forces of industry structure. This paper examines a general equilibrium monopolistic competition model with heterogeneous firms and intra-industry reallocations. We show that the welfare superiority of ad valorem over unit taxes under imperfect competition is not only preserved but amplified. The additional difference between the tools arises because unit taxes distort relative prices, which in turn reduces average industry productivity through reallocations (the survival and increased market share of lower productivity firms). Importantly, numerical solutions of the model reveal that the relative welfare loss from using the unit tax increases dramatically in the degree of firm heterogeneity.",
keywords = "Unit tax, Ad valorem tax, Welfare, Intra-industry reallocation, Monopolistic competition, Heterogenous firms",
author = "Schr{\"o}der, {Philipp J.H.} and Allan S{\o}rensen",
year = "2010",
doi = "10.1007/s00712-010-0159-7",
language = "English",
volume = "101",
pages = "247--265",
journal = "Journal of Economics",
issn = "0931-8658",
publisher = "Springer Wien",
number = "3",

}

RIS

TY - JOUR

T1 - Ad valorem versus unit taxes

T2 - Monopolistic competition, heterogeneous firms, and intra-industry reallocations

AU - Schröder, Philipp J.H.

AU - Sørensen, Allan

PY - 2010

Y1 - 2010

N2 - Real-world industries are composed from heterogeneous firms and substantial intra-industry reallocations take place, i.e. high productivity firms squeeze out low productivity firms. Previous tax-tool comparisons have not included these central forces of industry structure. This paper examines a general equilibrium monopolistic competition model with heterogeneous firms and intra-industry reallocations. We show that the welfare superiority of ad valorem over unit taxes under imperfect competition is not only preserved but amplified. The additional difference between the tools arises because unit taxes distort relative prices, which in turn reduces average industry productivity through reallocations (the survival and increased market share of lower productivity firms). Importantly, numerical solutions of the model reveal that the relative welfare loss from using the unit tax increases dramatically in the degree of firm heterogeneity.

AB - Real-world industries are composed from heterogeneous firms and substantial intra-industry reallocations take place, i.e. high productivity firms squeeze out low productivity firms. Previous tax-tool comparisons have not included these central forces of industry structure. This paper examines a general equilibrium monopolistic competition model with heterogeneous firms and intra-industry reallocations. We show that the welfare superiority of ad valorem over unit taxes under imperfect competition is not only preserved but amplified. The additional difference between the tools arises because unit taxes distort relative prices, which in turn reduces average industry productivity through reallocations (the survival and increased market share of lower productivity firms). Importantly, numerical solutions of the model reveal that the relative welfare loss from using the unit tax increases dramatically in the degree of firm heterogeneity.

KW - Unit tax

KW - Ad valorem tax

KW - Welfare

KW - Intra-industry reallocation

KW - Monopolistic competition

KW - Heterogenous firms

U2 - 10.1007/s00712-010-0159-7

DO - 10.1007/s00712-010-0159-7

M3 - Journal article

VL - 101

SP - 247

EP - 265

JO - Journal of Economics

JF - Journal of Economics

SN - 0931-8658

IS - 3

ER -