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The B.E. Journal of Economic Analysis & Policy

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Volume 15, Issue 4 (Oct 2015)


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Limiting Profit Shifting in a Model with Heterogeneous Firm Productivity

Dominika LangenmayrORCID iD: http://orcid.org/0000-0002-4228-5046
Published Online: 2015-04-28 | DOI: https://doi.org/10.1515/bejeap-2014-0058


This paper analyzes measures that limit firms’ profit shifting activities in a model that incorporates heterogeneous firm productivity and monopolistic competition. Such measures, e.g. thin capitalization rules, have become increasingly widespread as governments have reacted to growing profit shifting activities of multinational companies. However, besides limiting profit shifting, such rules entail costs. As the regulations can only focus on the means to shift profits, not on profit shifting itself, they impose costs on all firms, no matter whether these firms shift profits abroad or not. In the model, these costs force some firms to exit the market. Thus, as the resulting lower competition makes the remaining firms more profitable, regulations to limit profit shifting may even increase the aggregate amount of profits shifted abroad. From a welfare point of view, it can be optimal not to limit profit shifting by such rules.

Keywords: profit shifting; heterogeneous firms; tax competition

JEL Classification: H25; F23; H73


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About the article

Published Online: 2015-04-28

Published in Print: 2015-10-01

Funding: Financial support from the Bavarian Graduate Program in Economics is gratefully acknowledged.

Citation Information: The B.E. Journal of Economic Analysis & Policy, ISSN (Online) 1935-1682, ISSN (Print) 2194-6108, DOI: https://doi.org/10.1515/bejeap-2014-0058. Export Citation

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