Corporate Taxation and Multinational Activity



same way with the homogeneous good Z .

3.1 Households

Preferences are assumed to be a Cobb-Douglas nest of the homogeneous Z-
good and the differentiated
X -good. The price of Z serves as the num´eraire. Ui
describes the utility function of a representative household in country i, where
μ denotes the fixed expenditure share for differentiated products and σ > 1 is
the elasticity of substitution between differentiated product varieties:

Ui


Xic


Xμc (Ziii + Zjji) μ ,
(l^                    Пп
σ1            —1

1j  + hi Xhj) σ

σ-1

σ-1       X χ V σ --- -1

+ hj XX^ σ + vi      J + vj (Xj )σ-


(1)


Transportation of the differentiated X -good across the border is subject to
iceberg transport costs (
τ) for the shipment of each unit. Z-goods, in contrast,
are costlessly tradeable.

For each firm type and location, the utility maximization of consumers yields
demand for a single variety of manufactures

Xji  =  Ppki} σpσ- 1 μE    i { 1, 2}    k {n,h}

Xkii  =  (j´ -σ Piσ-1 μEi    i = j { 1, 2}      k {h,v}

Xj  =  (PVji}-σ pσ- 1 μEi    i = j { 1, 2}

Xnji  =  (Pnji)' Pk- 1 μEi    i = j { 1, 2}∙                        (2)

Ei represents the total expenditures of consumers in country i. The price index
Pi of differentiated goods consumed in country i can be written as

Pi


ni (Pki) 1-σ + nj (Pnji¢ 1 -σ + hi (Pki´ 1 -σ

1

(j ∖ 1 —σ                i .              s^izτ 1—

Pai)     + vi (Pvji ¢     + vj (Pυvii ¢

(3)


Expenditures for X and Z are allocated as follows:

Xic


μEi

Pi ,


(4)




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