The name is absent

Proposition 3: When tax competition among small jurisdictions is sufficiently
strong to eliminate all rents so that u⁰_g = u⁰_p = u⁰, public goods will be under-
provided and the supply of public goods will satisfy the condition

^gU^α) = ^μr-α)( 1-тЬ) ) Fl.          (3.4)

u     -α   -ε -α

Proof: See Appendix 3.

Under tax competition public goods are underprovided (i.e. g⁰(α) /u⁰ >F_L)
since the international mobility of capital causes the tax base to be elastic from the
individual country’s perspective whereas from the viewpoint of the world economy
as a whole it is in fact inelastic. However, under autarky we saw that the supply of
public goods is also distorted, due to the bias in the political process. To evaluate
which regime is likely to generate the biggest distortions, it is useful to consider
a quantitative version of our model.

3.3. Is tax competition good or bad? A numerical general equilibrium
analysis

To illustrate how rents, public goods provision and social welfare may evolve as
the number of competing jurisdictions increases, we simulate a calibrated version
of our model, assuming a Cobb-Douglas production function

and preferences of the form

C1-σc             θα1-σg

u (C) =  ------, g (α) =  ------,   σc > 0,   σg > 0, θ > 0,

1 - σ_c        1 - σg

where the parameter θ reflects the preference for public goods. Assuming β = 0.25
and σc = σg = 5;¹⁵ postulating a political distortion δ = 0.12; setting θ =1,and
calibrating the parameters A and k to ensure a realistic relative size of the public

¹⁵In an intertemporal context, our parameter σ_c would be identical to the inverse of the
intertemporal elasticity of substitution in private consumption. Based on the estimates of the
latter parameter by Hall (1988), σ_c should be at least 5, whereas the estimates presented in
Attanasio and Weber (1995) imply values of σ_c between 2.2 and 4.7.

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