Productivity Gaps and Tax Policies Under Asymmetric Trade

CER-ETH – Center of Economic Research at ETH Zurich, Working Paper 16/239

68 Pages Posted: 22 Mar 2016

See all articles by Lucas Bretschger

Lucas Bretschger

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich

Simone Valente

Norwegian University of Science and Technology (NTNU)

Date Written: March 17, 2016

Abstract

We build a two-country model of endogenous growth to study the welfare effects of taxes on tradable primary inputs when countries engage in asymmetric trade. We obtain explicit links between persistent gaps in productivity growth and the incentives of resource exporting (importing) countries to subsidize (tax) domestic resource use. The exporters' incentive to subsidize hinges on slower productivity growth and is disconnected from the importers' incentive to tax resource in flows i.e., rent extraction. Moreover, faster productivity growth exacerbates the importers' incentive to tax, beyond the rent-extraction motive. In a strategic tax game, the only equilibrium is of Stackelberg type and features, for a wide range of parameter values, positive exporters' subsidies and positive importers' taxes at the same time. The model predictions concerning the impact of resource taxes on relative income shares are supported by empirical evidence.

Keywords: Productivity Gaps, Endogenous Growth, International Trade, Tax Policy

JEL Classification: O40, F43

Suggested Citation

Bretschger, Lucas and Valente, Simone, Productivity Gaps and Tax Policies Under Asymmetric Trade (March 17, 2016). CER-ETH – Center of Economic Research at ETH Zurich, Working Paper 16/239 , Available at SSRN: https://ssrn.com/abstract=2752370 or http://dx.doi.org/10.2139/ssrn.2752370

Lucas Bretschger (Contact Author)

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland

Simone Valente

Norwegian University of Science and Technology (NTNU) ( email )

Department of Economics
NTNU Dragvoll
Trondheim NO-7491
Norway

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