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Interjurisdictional Spillovers, Decentralized Policymaking, and the Elasticity of Capital Supply

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Abstract:

This paper points to the important role that the elasticity of aggregate capital supply with respect to the net rate of return to capital plays for the efficiency of policymaking in a decentralized economy with mobile capital and spillovers among jurisdictions. In accordance with previous studies, we show that under the assumption of a fixed capital supply (zero capital supply elasticity) the decentralized policy choice is optimal. If the capital supply elasticity is strictly positive, however, capital tax rates are inefficiently low in the decentralized equilibrium.

Document Type: Research Article

DOI: http://dx.doi.org/10.1257/aer.102.5.2349

Publication date: August 1, 2012

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