Specific taxation, asymmetric costs, and endogenous quality

Abstract

This paper shows how a specific tax—in contrast to an ad valorem tax—alters industry structure and firm‐level performance in a monopolistic competition framework, where firms chose product quality endogenously and differ exogenously in productivity (i.e., marginal production efficiency). Industry equilibrium mechanisms and selection based on productivity play a significant role: A specific tax shifts market shares and profits toward firms with costs and prices above the industry average at the expense of low‐cost firms. This reallocation of market shares releases a novel scale effect such that low‐cost firms may quality downgrade, while high‐cost firms always quality upgrade. There exists a parameter subspace, where this combines to a decrease on average quality for the industry. In comparison: An ad valorem tax only reduces the number of firms/varieties in the industry due to demand absorption, but affects neither firm‐level performance nor industry structure.

Corporate tax cuts in a Schumpeterian growth model with an endogenous market structure

“…2 More broadly, this paper also relates to the literature on market structure effects of taxation. For example, Schröder and Sørensen (2021) show that a specific tax changes the product quality, which is endogenously chosen by the firms. They demonstrate that there exists a parameter range where an increase in the specific tax rate reduces the average quality of the industry.…”

Choosing between imperfect proxies for a corrective tax

“…Knittel and Sandler (2018) assume that externalities are distributed log-normally, and consider different possibilities regarding correlation of externalities with price responses. Under these assumptions, aggregate deadweight loss can be represented with a simple 1 Some previous work does take an analytic approach to comparing volumetric and ad valorem taxes, but does not focus on settings with internalities or externalities (Delipalla & Keen, 2006;Schröder & Sørensen, 2021). Pirttilä (2002) compares an ad valorem tax with a specific tax that targets an externality directly, rather than a proxy.…”

Free and second‐best entry in oligopolies with network effects

“…With firm-specific networks, individual equilibrium output always decreases with entry, and under-entry may hold but only by one firm.5Other (recent) studies that consider endogenous entry are Suzuki (2020) andSchröder and Sørensen (2020). The first one with innovation in a dynamic general equilibrium setting, the second one in a model of monopolistic competition with endogenous quality.…”