Endogenous timing in tax competition: The effect of asymmetric information

Abstract

AbstractThis study explores the effects of asymmetric information on endogenous leadership in a simple tax competition environment. The study models a two‐country economy where one country is informed about its own and opponent's productivity of private goods, while the other country only knows its productivity. The results show that each type of informed country has an incentive to pretend to be the other type, which leads to a Stackelberg outcome endogenously, while the simultaneous move is the unique outcome under complete information. Under the Stackelberg outcome, the uninformed country moves first and the informed country moves second. Moreover, ex‐post social welfare under asymmetric information can become larger than that under complete information, because the uninformed country chooses a less aggressive tax rate under asymmetric information. These results depend on the type of uncertainty, and capital ownership and share.