Strategic tax competition: An experimental study

This paper examines a strategic tax competition model. I study the effect of different preferences for the public good (and resulting payoff changes) on choices, where policy makers choose one of four tax rates. Three tax competition games are derived with symmetrically low preferences and payoffs; asymmetric preferences and payoffs; and symmetrically high preferences and payoffs. Policy makers are paired both randomly and repeatedly. I investigate the effect of (1) asymmetric needs for the public good (and resulting payoff advantage) and (2) symmetrically higher public good needs. I establish that preference for the public good does affect tax choices but not always as predicted by theory. My results show (1) fiercer competition for symmetrically higher public good needs, (2) difference in behavior of policy makers under asymmetric preferences, and (3) that under repeated interactions, cooperation can be sustained only when countries have symmetric public good needs, with almost no cooperation emerging for asymmetric preferences.