Economics and Politics Research Group

Insensitive Multinationals? Competitive Subsidies and Carbon and Corporate Income Taxes

Emilson Caputo Delfino Silva

Vander Mendes Lucas

One of the crucial aspects of international mobility of firms that we wish to consider is the fiscal stimulus that a nation may offer to multinationals but not to domestic firms. The subsidy is the policy instrument that allows each nation to control the size of its industry. Our simple international economy enables us to identify the effects that international mobility cause to the allocation of resources. We examine two scenarios, one in which multinationals are insensitive and another in which multinationals are sensitive. Multinationals are insensitive if their mobility decisions do not depend on subsidies and taxes. In the Nash equilibrium with insensitive multinationals, each nation overprovides its national public good. With symmetric tax bases, both nations provide equal amounts of public goods and set their relative carbon taxes efficiently. We find that if nations need to make efforts to attract multinationals, they will be more sensitive to the tax burden that its taxes cause to multinationals. The optimal national subsidy policies nullify the excessive burden that multinationals face relative to domestic firms. As the optimal national policies for provision of public goods and control of carbon emissions demonstrate, the nations essentially treat multinationals as domestic firms in the setting with sensitive multinationals. The relative carbon tax rate in the resource-poor nation exceeds the efficient rate, and the latter exceeds the relative carbon tax rate the resource-rich nation charges.

Keywords: insensitive multinationals, corporate income tax, carbon tax, subsidies.

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The Economics and Politics Research Group started publishing its working papers on June 12, 2013. Please check here every week for a new working paper.

Análise dos Impactos de Choques em Preços de Combustíveis na Competição entre Empresas Aéreas

Cicero Rodrigues de Melo Filho

Davi Prado Novais Moura

Vander Mendes Lucas

Francisco Gildemir Ferreira da Silva

This paper investigates the effects of exogenous cost shocks on the competition between Full Service Carriers (FSC) and Low Fare Carriers (LFC) in the airline industry. We develop an oligopoly model of airline competition with exogenous fuel costs and simulate increases in total costs. We apply the model to the case of the most important Brazilian domestic route, using airline/route-specific demand and costs data. The contribution of this paper relies on the empirical model of asymmetric economies of density for the competing business models applied to fuel cost shocks. Results show that LFC’s Airlines suffer greater losses of markup and demand in comparison with their rival (FSC), however they also increase the price proportionally more than their rivals. We find that, on account of the airlines have similar sizes, less changes were observed which gives a more predictable environmental to consumers. The results are attenuated by higher economies of density, but amplified by higher price-elasticities of demand and lower economic growth.

Keywords: Airlines; Markups; Fuel cost pass-through; Oligopoly; Industrial Organization.

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The Economics and Politics Research Group started publishing its working papers on June 12, 2013. Please check here every week for a new working paper.

Testing the Algebraic Modeling of Competitive Impacts from Wage Premium Shocks. A Case Study from a Booming Airline Market

Cicero Rodrigues de Melo Filho

Vander Mendes Lucas

Francisco Gildemir Ferreira da Silva

Alessandro Vinicius Marques de Oliveira

Labor relations issues such as collective bargaining and strike threat power have recently gained increased attention in the Brazilian air transportation market due to a short-term shortage of qualified workforce, leading stronger pilot unions to demand higher wages and better working conditions. Exacerbated by the notable expansion of the Brazilian economy between 2020 and 2023, where air travel demand surged by 60%, this pressure has driven labor costs to grow more rapidly than other cost categories. This paper examines exogenous flight crew cost shocks, treating these as increases in wage premiums resulting from stronger unionization and higher labor market rents. Using a differentiated duopoly model, we analyze the impact of these wage increases on competition between a major network carrier and a small low-fare carrier, introducing the hypothesis of non-exhausted economies of density. Our findings indicate that smaller airlines are more adversely affected by labor cost shocks, though differentiated wage increase schemes can mitigate these impacts, reducing market concentration and preserving consumer welfare. This study contributes to the literature by incorporating wage premium shocks into existing models and suggesting that labor regulations in Brazil should be liberalized to address the rapid growth in air transportation demand and the resultant workforce shortage.

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The Economics and Politics Research Group started publishing its working papers on June 12, 2013. Please check here every week for a new working paper.

Análise Custo-Benefício do Preço-Sombra da Mão de Obra Brasileira

Cícero Rodrigues de Melo Filho

Vander Mendes Lucas

Francisco Gildemir Ferreira da Silva

A distorção preços de mercado em avaliações de projetos de infraestrutura é algo preocupante, já que pode resultar em decisões erradas e, como consequência, no desperdício de recursos públicos. Embora haja um avanço considerável na literatura internacional sobre como medir esse problema, ainda há uma lacuna em termos de pesquisa nacional, especialmente na América Latina e, em particular, no Brasil. Este trabalho busca revisitar essa literatura, criando uma base para identificar avanços, estudos relevantes e possíveis abordagens para o Brasil.

The Economics and Politics Research Group started publishing its working papers on June 12, 2013. Please check here every week for a new working paper.

There is Trouble with the Trees: How to Avoid Trade-Induced Deforestation?

Alan Leal and Maurício Bugarin

Trade and environment are intertwined subjects. The literature on the impact of trade opening on environmental outcomes are vast. Lacking however is the literature in how trade can be used politically to induce better environmental outcomes. To model this properly, we develop a game theoretic model in which two countries engage in trade and choose their respective levels of deforestation and trade tariffs. We consider the scenarios of market and central equilibria and derive some useful insights into their relationship of these two variables. As an extension, we also propose different model specifications and develop a numeric generalization of the model, which allows testing our models prediction for several countries. As a result, we find that there is an incentive for free-riding from the countries less concerned with deforestation on the countries that suffer the most disutility of its own deforestation.

Keywords: trade; deforestation; game theory.

The Economics and Politics Research Group started publishing its working papers on June 12, 2013. Please check here every week for a new working paper.