ASYMMETRIC TAX COMPETITION

The paper analyzes Nash equilibrium when two jurisdictions set tax rates on a tax base which is mobile between them. Population differences imply tax differences. The smaller jurisdiction levies a lower tax rate in equilibrium, and its residents are better off than those in the larger jurisdiction. The Nash equilibrium is inefficient. If the two jurisdictions merged, the resulting allocation would be efficient. However, if differences in population are great enough, residents of the small jurisdiction would be made worse off by such a merger. © 1991.