Working Paper: NBER ID: w1994
Authors: Roger H. Gordon; Hal R. Varian
Abstract: This paper shows, using a standard CAPM model of security prices in a world market, \nthat even small countries can affect the price of domestically issued risky securities, while \nlarge countries can affect the prices of all securities. As a result, countries have the incentive to set tax rates such that in equilibrium investors specialize in domestic securities, and net capital flows between countries are restricted. Each country does this to increase the utility of domestic residents, taking as given the tax policies of other governments, but the net outcome is a reduction in world efficiency and likely a reduction in the utility of all individuals.
Keywords: Taxation; Asset Income; World Securities Market
JEL Codes: H25; F21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government tax policy (H29) | Investor specialization in domestic securities (G24) |
| Investor specialization in domestic securities (G24) | Restricted net capital flows between countries (F32) |
| Restricted net capital flows between countries (F32) | Decreased world efficiency (D61) |
| Restricted net capital flows between countries (F32) | Decreased overall utility for individuals globally (F69) |
| Government tax policy (H29) | Restricted net capital flows between countries (F32) |
| Government tax policy (H29) | Decreased world efficiency (D61) |
| Government tax policy (H29) | Decreased overall utility for individuals globally (F69) |