Commodity taxation and regulatory competition

This paper studies competition in commodity taxation and product market regulation between trading partner countries. We present a two-country general equilibrium model in which destination-based commodity taxes finance public goods, and prod- uct market regulation affects both the number of firms in the market and product diversity. We provide empirical evidence based on data for 21 OECD countries over the 1990-2008 period. Our results suggest that commodity taxation and product market regulation are interdependent policies. Theoretically and empirically we find an absence of strategic interaction in commodity taxation between governments. Furthermore, we show that domestic regulation has a negative effect on domestic commodity taxation. Finally, we demonstrate theoretically and show empirically that product market regulation is a strategic complementary policy.