Essays on the Interaction Effects of Policies Across Jurisdictions.

Abstract

This dissertation analyzes the theoretical and empirical effects of cross-border policy dynamics, specifically state level bottle deposit-redemption systems and international corporate income taxation. As governments can only enact policies within their own jurisdictions, borders often become areas with policy discontinuities. Mobility of economic factors allows firms and consumers to take advantage/arbitrage across such divides. The presence of borders therefore carries important positive and normative policy implications.

Chapter 1 analyzes the effect of Michigan's deposit-redemption system on Michigan as well as Indiana and Ohio, two bordering states with no such policy. In conjunction with a sales tax differential between the three states, households are theoretically able to fraudulently redeem out-of-state bottles and evade use taxes via cross-border shopping. I hypothesize that evidence of this behavior should be reflected in the patterns of retail prices for deposit eligible goods near these borders. Results from a simulated model of imperfect competition and mobile households suggest that the main determinant of prices is travel costs. I then empirically analyze an original dataset and find that retail prices are increasing and decreasing with distance from the border in Indiana/Ohio and Michigan, respectively. At the border, prices are generally higher on the Michigan side.

Chapters 2 and 3 analyze the strategic interactions between corporate income taxes of countries that compete to attract mobile firms and capital. Specifically, I analyze the equilibrium revenue implications when competing countries offer preferential tax rates for targeted tax bases. Chapter 2 uses numerical methods to generalize existing theoretical literature in analyzing a less restrictive model of international tax competition. In the context of bilateral tax agreements, I find that countries with greater productivity and population asymmetry generate greater equilibrium revenues by allowing for preferential policies. Conversely, more symmetric countries would do better by banning such policies. Chapter 3 focuses specifically on the equilibrium revenue effect of cross-country profit correlation, i.e., the degree to which firms generate the same profits across different countries. As profit correlation decreases, preferential regimes become more revenue-dominant.