Interjurisdictional Spillovers, Decentralized Policymaking, and the Elasticity of Capital Supply
American Economic Review · 2012 · Volume 102 · Issue 5
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. (JEL E22, E61, H25, H77)
Keywords
Capital, Investment, Capacity, Policy Objectives, Policy Designs and Consistency, Policy Coordination, Business Taxes and Subsidies including sales and value-added (VAT), Intergovernmental Relations, Federalism, Secession
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