Tax efficiency in a model of endogenous markups

Durceylan Kaygusuz, Esra (2019) Tax efficiency in a model of endogenous markups. SERIEs - Journal of the Spanish Economic Association (SI), 10 (3-4). pp. 401-418. ISSN 1869-4187 (Print) 1869-4195 (Online)

This is the latest version of this item.

[thumbnail of Open Access] PDF (Open Access)

Download (428kB)


Efficiency comparison of ad valorem and unit taxes has been traditionally based on consumer welfare. However, if the tax instrument also affects the distribution of firms over their productivities, the policy maker may be concerned about the implications on aggregate productivity as well. This paper makes an efficiency comparison of ad valorem and unit taxes by allowing the distribution of firms to respond to changes in policy. First, I make an efficiency comparison in a model with monopolistically competitive firms that are homogenous with respect to their productivity levels. Consumer preferences exhibit love for variety and allow firms to adjust their markups. I find that ad valorem tax is more efficient. Allowing for firm heterogeneity overturns this result at high revenue requirements. As the tax rate increases, ad valorem tax causes excessive exit of firms which makes the market more competitive. Hence, few surviving firms price lower by decreasing their markups. Lower prices decrease the tax revenue collected. As a result under ad valorem tax regime, higher consumer surplus is dominated by lower tax revenue. On the other hand, production is concentrated among relatively more productive firms. Thus, aggregate productivity is higher under ad valorem tax regime.
Item Type: Article
Uncontrolled Keywords: Unit tax; Ad valorem tax; Efficiency; Monopolistic competition; Heterogenous firms
Divisions: Faculty of Arts and Social Sciences > Academic programs > Economics
Faculty of Arts and Social Sciences
Depositing User: Esra Durceylan Kaygusuz
Date Deposited: 11 Mar 2021 15:46
Last Modified: 28 Jul 2023 12:06

Available Versions of this Item

Actions (login required)

View Item
View Item