Job market paper

Taxation of Multi-Product Firms with Cost Complementarities

I analyze how taxes impact prices, quantities, and welfare when products are connected via demand or cost relationships. Exploiting spatial and temporal variation in taxes from 1993 to 2015, I estimate a discrete-choice, oligopoly model of the U.S. domestic aviation industry, a network setting where demand-side substitutes are straightforward to observe and cost complementarities arise naturally. I show that cost complementarities increase incidence on taxed products and cause incidence to spill over across a firm's products. Taxation of hub airports generate larger spill-over effects and greater negative effects on consumer welfare. Counterfactual simulations of revenue-neutral tax policies show standardizing taxes across routes slightly increases consumer welfare while subsidizing hubs increases consumer welfare marginally. I discuss heterogeneity in welfare changes across markets and product type as well as how substitutable products and cost complementarities can minimize tax distortions.

Fields

Industrial organization, Public economics, Applied microeconomics

Other papers

Taxation in the Aviation Industry: Insights and Challenges David R. Agrawal, Jonathan W. Williams

Taxation in Networks: Evidence from the Airline Industry David R. Agrawal, Jonathan W. Williams