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EVOLUTIONARY COMPETITION AND PROFIT TAXES: MARKET STABILITY VERSUS TAX BURDEN

Published online by Cambridge University Press:  08 November 2016

Noemi Schmitt  and
Frank Westerhoff
Noemi Schmitt*
Affiliation:
University of Bamberg
Frank Westerhoff
Affiliation:
University of Bamberg
*
Address correspondence to: Noemi Schmitt, Department of Economics, University of Bamberg, Feldkirchenstrasse 21, 96045 Bamberg, Germany; e-mail: noemi.schmitt@uni-bamberg.de.
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Abstract

The seminal cobweb model by Brock and Hommes reveals that fixed-point dynamics may turn into increasingly complex dynamics, as firms switch more quickly between competing expectation rules. While policy makers may be able to manage such rational routes to randomness by imposing a proportional profit tax, the stability-ensuring tax rate may cause a very high tax burden for firms. Using a mix of analytical and numerical tools, we show that a rather small profit-dependent lump-sum tax may even be sufficient to take away the competitive edge of cheap destabilizing expectation rules, thereby contributing to market stability.

Keywords

Cobweb ModelsIntensity of ChoiceProfit TaxesTax Burden
Type
Articles
Information
Macroeconomic Dynamics , Volume 22 , Issue 8 , December 2018 , pp. 2007 - 2031
Copyright
Copyright © Cambridge University Press 2016 

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Footnotes

This paper was presented at the 21st International Conference on Computing in Economics and Finance, June 20–22, 2015, Taipei, Taiwan, at the Workshop on Complexity Economics and Macroeconomic Dynamics, May 12 and 13, 2016, Hamburg, Germany, and at the GeComplexity Conference, May 26 and 27, 2016, Heraklion, Greece. We thank the participants for their encouraging and stimulating comments. The paper also benefitted from valuable feedback from two referees and an associate editor.

References

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