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Davies, Ronald B. and Eckel, Carsten (2010): Tax Competition for Heterogeneous Firms with Endogenous Entry. In: American Economic Journal: Economic Policy, Vol. 2, No. 1: pp. 77-102

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This paper models tax competition for mobile firms that aredifferentiated by their productivities Because taxes affect thedistribution of firms, they affect wages prices, and the number of firmsFrom the social planner’s perspective, optimal taxes efficientlydistribute income between private and public consumption and areharmonized, providing the optimal number of firms This is not a Nashequilibrium As is common in such models equilibrium taxes areinefficiently low Furthermore there is no pure strategy equilibrium withequal taxes resulting in too many firms This illustrates a newdistortion from tax competition and a new benefit from harmonization

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