Equilibrium Leadership in Tax Competition for Endogenous Capital Supply

In this paper, we reconsider the leadership of tax competition, focusing on a situation where total amount of capital competed by countries is endogenously determined. For the purpose, we model a timing game under asymmetric tax competition, in which the capital competed among two countries is supplied not only by the residents of the two countries, but also by exogenous investors, depending on the rate of return to capital in the integrated market and how accessible it is for investors outside of the countries. As a result, it is found that, when the capital market becomes more accessible for exogenous investors, sequential-move equilibria are more likely to be realized, in which one country leads and the other follows. Contrarily, only simultaneous-move equilibrium emerges, when the openness of the market is sufficiently small.