Aarhus University Seal / Aarhus Universitets segl

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

Research output: Working paperResearch


  • Wp10 10

    Final published version, 174 KB, PDF document

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.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages18
Publication statusPublished - 2010

    Research areas

  • unit tax, ad valorem tax, welfare, intra-industry reallocation, monopolistic competition, heterogenous firms

See relations at Aarhus University Citationformats

Download statistics

No data available

ID: 20627085