Buyer and Seller Concentration in Global Commodity Markets

In recent years there has been an increased incidence of export restrictions applied by developing countries to commodities and raw materials. Commodity markets may be characterized by concentration on the buyer side, with a small number of transnational intermediary firms purchasing from supplying countries and distributing to the market, and recent work has suggested that export taxes may be an optimal policy to recapture monopsony rent. However, in many commodity markets there are also a limited number of large supplying countries. This paper considers a situation where an oligopsonistic intermediary industry purchases from a small number of supplying countries, the governments of which act strategically in their policy choices both with respect to the intermediaries and any competing suppliers. In the resulting two‐stage game, the paper shows that an export subsidy, rather than an export tax, may arise as the optimal intervention.     

Numerical solution of dynamic oligopoly games with capital investment

Summary. This paper discusses how numerical techniques may be used to solve the simultaneous functional equations that arise in general dynamic stochastic games. Unlike the conventional linear-quadratic approach, our methods may be used to address general model specifications that may include non-quadratic objective functions, non-linear equations of motion, and constraints on decision variables. As an illustration, we apply our methods to a dynamic duopoly game in which competing firms play short-run quantity game subject to production cost that can be lowered through investment in capital stock in the long run. Received: June 1, 2000; revised version: December 27, 2000     

Public Goods and Tax Competition in a Two‐Sided Market

A rather neglected issue in the tax competition literature is the dependence of equilibrium outcomes on the presence of firms and shoppers (two‐sided markets). Making use of a model of vertical and horizontal differentiation, within which jurisdictions compete by providing public goods and levying taxes in order to attract firms and shoppers, this paper characterizes the noncooperative equilibrium. It also evaluates the welfare implications for the jurisdictions of a popular policy of tax coordination: The imposition of a minimum tax. It is shown that the interaction of the two markets affects the intensity of tax competition and the degree of optimal vertical differentiation chosen by the competing jurisdictions. Though the noncooperative equilibrium is, as it is typically the case, inefficient such inefficiency is mitigated by the strength of the interaction in the two markets. A minimum tax policy is shown to be effective when the strength of the interaction is weak and ineffective when it is strong.     

Managing the quality of a resource with stock and flow controls

We consider a class of problems, which we call “SFQ” problems, in which both stocks and flows can be controlled to promote the quality of a valued resource, such as environmental quality or public infrastructure. Under the optimal policy, periodic restoration of the stock of quality complements positive but variable abatement of the flow of damages. When deterioration is more rapid or highly variable, or when abatement is more expensive relative to restoration, the optimal policy relies relatively more on restoration.When deterioration is due to private firms or individuals, a flow tax equal to the present value of marginal damages provides efficient incentives for abatement. This tax rises at first as quality worsens, but eventually falls as restoration nears. The revenues raised by such a tax approximates the cost of restoration, with the two quantities converging as the variance of flows goes to zero.We discuss the implications of the SFQ model for a range of real-world problems in the environmental arena, and for the management of public infrastructure. But the lessons are general, and we briefly discuss how they apply to private stocks of physical and human capital.     

A Stackelberg Game Model of Trade in Renewable Resources with Competitive Sellers*

We model international trade in renewable resources between a single buyer and competitive sellers as a Stackelberg differential game. The buyer uses unit and ad valorem tariffs to indirectly encourage conservation of the renewable resource under study. First, we show that the efficacy of these trade policy instruments in promoting conservation depends fundamentally on whether harvesting costs are stock dependent or independent. When harvesting costs are stock independent, the optimal open‐loop tariffs are dynamically consistent. In contrast, when harvesting costs are stock dependent, the optimal open‐loop tariffs are dynamically inconsistent. Secondly, we point out that whether the terminal value of the resource stock is higher with the stock independent or the stock dependent cost function cannot be resolved unambiguously. Thirdly, we show that it does not make sense for the buyer to use both tariffs simultaneously. Finally, we discuss the implications of these and other findings for renewable resource conservation in general.     

Consistency and optimality in a dynamic game of pollution control I: Competition

I model the interaction between a regulator and polluting firms as a Stackelberg differential game in which the regulator leads. The firms create pollution, which results in a stock extermality. I analyze the intertemporal effects of alternate pollution control measures in a competitive industry. The principal issue here concerns the dynamic inconsistency of the optimal solution. Inter alia, I compare the steady state levels of pollution under optimal and under time consistent policies.     

What does tax aggressiveness signal? Evidence from stock price reactions to news about tax shelter involvement

We study the stock price reaction to news about corporate tax aggressiveness. We find that, on average, a company's stock price declines when there is news about its involvement in tax shelters. We find some limited evidence for cross-sectional variation in the reaction. For example, the reaction is more negative for firms in the retail sector, suggesting that part of the reaction may be a consumer/taxpayer backlash. In addition, the reaction is less negative for firms that are viewed to be generally less tax aggressive, as proxied by the firm's cash effective tax rate. We interpret this as being consistent with the market reacting positively to evidence that a firm is trying to reduce taxes when their financial reports would lead one to believe the firm is not tax aggressive.     

DYNAMIC ENVIRONMENTAL TAXES UNDER INTERNATIONAL DUOPOLY

This paper studies a dynamic game of environmental taxes between two countries in the absence of explicit trade policies when both governments and firms act strategically. We demonstrate that the environmental tax in the steady‐state equilibrium in a dynamic environmental tax game is lower than that in a static environmental one. Therefore, the dynamic behaviour of the governments results in an increase in the environmental damage. Further, as a result of international cooperation on environmental taxes between two countries in the beginning of policy competition, there is an increase in the optimal environmental tax. This implies that it is important to set cooperative environmental taxes in the beginning of policy competition because non‐cooperative environmental taxes in the dynamic game result in the race‐to‐the‐bottom, which does not lead to environmental improvement.     

The environmental Porter hypothesis: theory,evidence, and a model of timing of adoption

The Porter hypothesis postulates that the costs of compliance with environmental standards may be offset by adoption of innovations they trigger. We model this hypothesis using a game of timing of technology adoption. We will show that times of adoption will be earlier if the non-adoption tax is higher. The environmental tax will turn the preemption game with low profits into a game with credible precommitment generating higher profits (pro-Porter). If there is a precommitment game without environmental taxes, the introduction of a tax will lead to lower profits (anti-Porter). An evaluation of the empirical literature indicates that the Porter hypothesis will hold even for profit-maximizing firms under multiple market imperfections such as imperfect competition, X-inefficiency, and agency costs. These are more likely to be present in sectors with large firms. In many case studies that we have evaluated, though, we detected an element of explicit or implicit subsidies for environmentally friendly behaviour, which is in line with Pigovian policies.     

Emissions abatement R&D: Dynamic competition in supply schedules

This paper investigates the optimal environmental policy (the mix of emissions tax and research and development [R&D] subsidy) in a dynamic setting when two firms, producing differentiated products, compete in the output market over time. Firms compete in a differential game setting over supply schedules, which encompasses a continuum of imperfect competition equilibria from Bertrand to Cournot. Although production generates environmentally damaging emissions, firms can undertake R&D that has the sole purpose of reducing emissions. In addition to characterizing the optimal policy, we examine how the optimal tax and subsidy, and the optimal level of abatement, change as competition intensifies, as the dynamic parameters change, and as the investment in abatement technology changes. In this setting, competition increases welfare through its impact on the final goods price. However, lower prices result in larger quantities and more pollution. Our key contribution is to show how the impact of increased competition on welfare depends on the extent of the market and the nature of preferences and technology.     

Effects of coordinated strategies on product and process R&;D

Using a game theoretical model on firms’ simultaneous investments in product and process R&D, we advance and empirically test hypotheses on the role of externalities on the optimal R&D portfolio of cooperating firms and independently competing firms. We use Community Innovation Survey data on 3,696 Italian manufacturing firms. In line with our model we find that members of a group of firms invest significantly more into product, process, and aggregate R&D than independent firms. Further, their R&D portfolios tend to show a higher product versus process ratio. However, with regard to R&D performance and efficiency we find that independent firms are superior.      

Managerial firms’ profitability,unions, and environmental taxes

This article examines how determining an optimal environmental tax in a Cournot duopoly with unionized labour markets and managerial firms departing from the strict profit-maximization. It is shown that firm-specific monopoly unions that set wages (1) reduce both the environmental tax and environmental damage and (2) counterintuitively, increase firms’ profitability when the abatement technology is not too “efficient”, and the public evaluation of environmental quality is sufficiently high. Within this framework, the work also develops the endogenous game played by firms that must choose between sales delegation (SD) and profit-maximization. Results show that the SD contract always emerges as the unique, deadlock sub-game perfect Nash equilibrium, thereby solving the (prisoner's) dilemma emerging in the related existing literature assuming a competitive labour market.     

Regulation of common property resources under private information about resource externalities

Optimal marginal investment incentives and optimal entry regulations are developed for a case where heterogeneous firms exploit a common property natural resource. The government’s objectives are to correct for resource externalities and to tax away the resource rent. Both individual output and efficiency levels are subject to private information, i.e. it is a model with multi-agency, externalities, and countervailing incentives. There are asymmetric information about the net revenue of the firm and the size of the resource externalities that the firm inflicts on the other firms in the industry. The latter implies that external effects are present both in the firms’ net incomes and in the information rents.     

Cost Manipulation Games in Oligopoly, With Costs of Manipulating

We analyze a class of two-stage games where rival firms incur real resource costs in manipulating their marginal costs, so as to influence the outcome of the game they want to play in stage two. Marginal costs may be manipulated by various means, such as redistribution of productive assets, choice of location, or creation of an internal input market. A general formulation of the game is provided, and several applications are analyzed. We show that the optimal allocation of resources within an oligopoly can be asymmetric, even for ex-ante symmetric firms. This is an additional explanation of heterogeneity in oligopoly.     

Dividend taxes,corporate investment,and ‘Q’

Taxes on corporate distributions have traditionally been regarded as a ‘double tax’ on corporate income. This view implies that while the total effective tax rate on corporate source income affects real economic decisions, the distribution of this tax burden between the shareholders and the corporation is irrelevant. Recent research has suggested an alternative to this traditional view. One explanation of why firms in the United States pay dividends in spite of the heavy tax liabilities associated with this form of distribution is that the stock market capitalizes the tax payments associated with corporate distributions. This capitalization leaves investors indifferent at the margin between a corporation's decision to pay out dividends or to retain earnings. This alternative view holds that while changes in the dividend tax rate will affect shareholder wealth, they will have no impact on corporate investment decisions.This paper develops econometric tests which distinguish between these two views of dividend taxation. By extending Tobin's ‘q’ theory of investment to incorporate taxes at both the corporate and personal levels, the implications of each view for corporate investment decisions can be derived. The competing views may be tested by comparing the performance of investment equations estimated under each theory's predictions. British time series data are particularly appropriate for testing hypotheses about dividend taxes because of the substantial postwar variation in effective tax rates on corporate distributions. The econometric results suggest that dividend taxes have important effects on investment decisions.     

Jurisdictional Tax Competition and the Division of Nonrenewable Resource Rents

This paper presents a model of nonrenewable resource extraction across multiple jurisdictions which engage in strategic tax competition. The model incorporates rents due to both resource scarcity and capital scarcity as well as intra-region Ricardian rents. Regions set taxes on nonrenewable resource production strategically to balance tax revenues and local benefits from investment conditional on other regions’ tax rates. A representative extraction firm then allocates production capital across regions and time to maximize the present value of profits. Generally, we find that the division of resource rent between firms and regional governments ultimately depends on the relative scarcity of natural and production capital, relative costs across space, and the value regional governments place on economic activity. This theoretical result provides policymakers with information on the determinants of optimal tax rates and motivates future empirical research on the factors influencing the division of resource rent in practice.     

A Cournot Mechanism for Pollution Control under Asymmetric Information

The contribution of this paper is to show that a simple nonlinear tax can achieve a long-run socially optimal level of pollution without the regulator knowing marginal abatement costs. Firms are charged their differential contribution to total damages, evaluated at the upper margin of current emissions. This induces a Cournot game in pollution levels. We show that the Nash equilibrium exists, corresponds to the socially optimal long-run output and emission levels and number of firms, is stable, and can be reached by iterative computations where conjectures are formed using a linear estimator based on past emission levels.     

Time and uncertainty in resource dilemmas: equilibrium solutions and experimental results

Most common pool resource (CPR) dilemmas share two features: they evolve over time and they are managed under environmental uncertainties. We propose a stylized dynamic model that integrates these two dimensions. A distinguishing feature of our model is that the duration of the game is determined endogenously by the users’ collective decisions. In the proposed model, if the resource stock level below which the irreversible event occurs is known in advance, then the optimal resource use coincides with a unique symmetric equilibrium that guarantees survival of the resource. As the uncertainty about the threshold level increases, resource use increases if users adopt decision strategies that quickly deplete the resource stock, but decreases if they adopt path strategies guaranteeing that the unknown threshold level is never exceeded. We show that under relatively high uncertainty about resource size, CPR users frequently implement decision strategies that terminate the game immediately. When this uncertainty is reduced, they maintain a positive resource level for longer durations.     

The Political Economy of the (Weak) Enforcement of Indirect Taxes

The objective of this paper is to understand the determinants of the enforcement level of indirect taxation in a positive setting. We build a sequential game where individuals, who differ in their willingness to pay for a taxed good, vote over the enforcement level. Firms then compete à la Cournot and choose the fraction of sales taxes to evade. We assume in most of the paper that the tax rate is set exogenously. Voters face the following trade‐off: more enforcement not only increases tax collection but also increases the consumer price of the goods sold in an imperfectly competitive market. We obtain that the equilibrium enforcement level is the one most preferred by the individual with the median willingness to pay, that it is not affected by the structure of the market (number of firms) and the firms’ marginal cost, and that it decreases with the resource cost of evasion and with the tax rate. We also compare the enforcement level chosen by majority voting with the utilitarian level. In the last section, we endogenize the tax rate by assuming that individuals vote simultaneously over tax rate and enforcement level. We prove the existence of a Condorcet winner and show that it entails full enforcement (i.e., no tax evasion at equilibrium). The existence of markets with less than full enforcement then depends crucially on the fact that tax rates are not tailored to each market individually.     

Network externality and incentive to invest in network security

Breaches of network security can result in substantial losses for businesses. A game theory-based model is developed to investigate in the short run how network externality influences the optimal strategy of competing online firms producing homogenous services to invest in NS. A firm's self-protect rate and survival probability against NS security incidents differ depending on its related investment decisions. The incentive of a firm to invest in NS is derived, and the impact of the survival probability and the effect of the number of firms investing in NS on a firm's incentive to invest in NS are also analyzed. Policy implications drawn from the study are provided at the end the work.