Consequences of Firm-level Heterogeneity for Corporate Financial and Tax Policy

Abstract

The existence of large and persistent between-firms differences in size and profitability is a pervasive supply-side characteristic, and it has important consequences regarding public and corporate policies. This dissertation turns to heterogeneous firms models to study the implications of such differences with respect to environmental taxation, corporate income taxation and corporate financial policy.

The first chapter investigates the intraindustry reallocations generated by environmental taxation in a standard heterogeneous firms model augmented with a production technology whereby labour can be substituted for pollution. It emphasizes how a pollution tax magnifies the selection due to firm-level heterogeneity, and shows that the proportion of winners and losers from the policy depends on the size distribution of firms within the industry.

Standard analyses of the structure of corporate income taxation typically recommend that the tax system be designed so as to offset firms market power. In the second chapter, it is argued that this conclusion rests on qualifying simplifications pertaining to the availability of outside resources and the discontinuity of the profits function. When this is taken taken into account, the optimal policy still consists in subsidizing the cost of capital, but only for the most productive firms.

Finally, the third chapter takes interest in the ambiguity of the empirical link between leverage and output market competition. It provides a theoretical explanation based on a heterogeneous firms model augmented with a financial market where the equilibrium depends upon output market conditions. Contrary to previous research, which only consider one-dimensional measures for competition, this framework disentangles the opposite impacts of product differentiation and the number of firms.

Date of Award	26 Sept 2016
Original language	English
Awarding Institution	University of Namur
Supervisor	Eric TOULEMONDE (Supervisor), Jean-Marie BALAND (President), Mathias HUNGERBUHLER (Jury), Mathieu Parenti (Jury) & Pierre Picard (Jury)