Entry in Tax Competition and Intergovernmental Transfer

Abstract

This paper derives an efficient intergovernmental transfer system within tax competition settings under the endogenization of the number of regions that engage in tax competition. In our theoretical model, two externalities arise. These include fiscal externalities and the externalities resulting from the endogenization of the number of regions. If a system is a full equalization system, inefficiency in the public input supply and the number of competing regions is resolved because two externalities can be internalized.