Discussion Papers 2017

CIRJE-F-1040	"Multi-Dimensional Pass-Through, Incidence, and the Welfare Burden of Taxation in Oligopoly"
Author Name	Adachi, Takanori and Michal Fabinger
Date	February 2017
Full Paper	PDF file
Remarks

Abstract
This paper studies welfare consequences of unit and ad valorem taxes in oligopoly with general demand, non-constant marginal costs, and a generalized type of competition. We present formulas providing connections between marginal cost of public funds, tax incidence, unit tax pass-through, ad valorem tax pass-through, and other economic quantities of interest. We show that there exists a simple, empirically relevant set of sufficient statistics for the marginal cost of public funds, namely the pass-through and the industry demand elasticity. Specializing to the case of price or quantity competition, we show how marginal cost of public funds and pass-through may be expressed using elasticities and curvatures of demand and inverse demand. These results apply also to symmetric oligopoly with multi-product firms. Finally, we present a generalization with the tax revenue function specified as a general function parametrized by a vector of tax parameters. We define multidimensional generalizations of pass-through and show that they are crucial for evaluating welfare changes in response to changes in taxation.
Keywords: Oligopoly; Unit tax; Ad valorem tax; Welfare; Pass-through; Elas- ticities; Curvatures; Sufficient statistics.

Abstract

This paper studies welfare consequences of unit and ad valorem taxes in oligopoly with general demand, non-constant marginal costs, and a generalized type of competition. We present formulas providing connections between marginal cost of public funds, tax incidence, unit tax pass-through, ad valorem tax pass-through, and other economic quantities of interest. We show that there exists a simple, empirically relevant set of sufficient statistics for the marginal cost of public funds, namely the pass-through and the industry demand elasticity. Specializing to the case of price or quantity competition, we show how marginal cost of public funds and pass-through may be expressed using elasticities and curvatures of demand and inverse demand. These results apply also to symmetric oligopoly with multi-product firms. Finally, we present a generalization with the tax revenue function specified as a general function parametrized by a vector of tax parameters. We define multidimensional generalizations of pass-through and show that they are crucial for evaluating welfare changes in response to changes in taxation.

Keywords: Oligopoly; Unit tax; Ad valorem tax; Welfare; Pass-through; Elas- ticities; Curvatures; Sufficient statistics.