This study examines the effect of horizontal fiscal externalities on the optimal matching grant rate in a model where agency costs are inevitable. The study finds that the degree of agency costs and benefit spillovers determine the relationship between tax competition and the optimal matching grant rate. If agency costs are relatively small and benefit spillover is zero, the optimal matching grant rate increases with the factors of production demand elasticities. Tax competition may ease inefficiency from agency costs only if the disutility of effort is large enough.
Publisher
Humanities & Social Sciences Communications
Published On
Jul 08, 2020
Authors
Tong Yang
Tags
horizontal fiscal externalities
optimal matching grant rate
agency costs
tax competition
benefit spillovers
production demand elasticities
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