Commodity tax competition and cross-border shopping in a tripoint model

Abstract

This paper extends commodity tax competition to cross-border shopping in a two-country model of three countries with a tripoint border and investigates whether a pure-strategy Nash equilibrium of tax competition exists. First, we find that unlike existing studies on the two-country model, there is no pure-strategy Nash equilibrium for tax competition in the three-country tripoint model. Second, we consider partial tax coordination between two countries and investigate how the population size of the countries affects the Nash equilibrium tax rates and tax revenues under tax coordination. Our results suggest that the existence of a pure-strategy Nash equilibrium is limited to a specific case of only two countries. When three countries with a tripoint engage in tax competition, we cannot predict what happens in the fiscal game between governments by the Nash equilibrium. Furthermore, the Appendix focuses on the marginally deviation-proof sets of tax rates instead of the Nash equilibrium and compares tax rates and tax revenues among the two sets of tax rates.