Resource Allocation and Tariff Strategies: Rethinking VAT in the Context of Monopolistic Competition.\thanks{This research has been conducted as part of the project Labex MME-DII (ANR11-LBX-0023-01). Declarations of interest: None.}

Resource Allocation and Tariff Strategies: Rethinking VAT in the Context of Monopolistic Competition.\thanks{This research has been conducted as part of the project Labex MME-DII (ANR11-LBX-0023-01). Declarations of interest: None.} | Research Square window.SnipcartSettings = { analytics: { enabled: false } }; (function() { var accessVector = localStorage.getItem('access_vector') || ''; window.dataLayer = window.dataLayer || []; if (accessVector) { window.dataLayer.push({ user: { profile: { profileInfo: { snid: accessVector } } } }); } })(); (function(w,d,s,l,i){w[l]=w[l]||[];w[l].push({'gtm.start':new Date().getTime(),event:'gtm.js'});var f=d.getElementsByTagName(s)[0],j=d.createElement(s),dl=l!='dataLayer'?'&l='+l:'';j.async=true;j.src='https://www.googletagmanager.com/gtm.js?id='+i+dl;f.parentNode.insertBefore(j,f);})(window,document,'script','dataLayer','GTM-K279D39R'); Browse Preprints In Review Journals COVID-19 Preprints AJE Video Bytes Research Tools Research Promotion AJE Professional Editing AJE Rubriq About Preprint Platform In Review Editorial Policies Our Team Advisory Board Help Center Sign In Submit a Preprint Cite Share Download PDF Research Article Resource Allocation and Tariff Strategies: Rethinking VAT in the Context of Monopolistic Competition.\thanks{This research has been conducted as part of the project Labex MME-DII (ANR11-LBX-0023-01). Declarations of interest: None.} Nicolas DJOB LI NGUE BIKOB This is a preprint; it has not been peer reviewed by a journal. https://doi.org/ 10.21203/rs.3.rs-8059818/v1 This work is licensed under a CC BY 4.0 License Status: Posted Version 1 posted You are reading this latest preprint version Abstract We study optimal commodity taxation in an open economy with monopolistic competition and asymmetric fiscal capacity. In a two-country model, a supranational authority uses destination-based consumption taxes to finance public spending, correct market distortions, and redistribute across countries. We show that in the first-best, domestically produced goods are always subsidized, while cross-border tax differentials emerge based on relative labor valuations. In the second-best, when lump-sum transfers are unavailable, the optimal tax system resembles a pattern of asymmetric tariffs: goods from countries with lower marginal costs of public funds are subsidized, while more competitive trade directions are taxed. These results challenge the conventional neutrality of VAT under trade liberalization and suggest that differentiated tax treatment by origin can improve welfare. Our findings call for a reassessment of uniform VAT regimes, especially in economically asymmetric unions. optimal taxation monopolistic competition fiscal asymetry tariff equivalence tax coordination VAT Full Text Additional Declarations No competing interests reported. Cite Share Download PDF Status: Posted Version 1 posted You are reading this latest preprint version Research Square lets you share your work early, gain feedback from the community, and start making changes to your manuscript prior to peer review in a journal. As a division of Research Square Company, we’re committed to making research communication faster, fairer, and more useful. We do this by developing innovative software and high quality services for the global research community. Our growing team is made up of researchers and industry professionals working together to solve the most critical problems facing scientific publishing. Also discoverable on Platform About Our Team In Review Editorial Policies Advisory Board Help Center Resources Author Services Accessibility API Access RSS feed Manage Cookie Preferences © Research Square 2026 | ISSN 2693-5015 (online) Privacy Policy Terms of Service Do Not Sell My Personal Information {"props":{"pageProps":{"initialData":{"identity":"rs-8059818","acceptedTermsAndConditions":true,"allowDirectSubmit":true,"archivedVersions":[],"articleType":"Research Article","associatedPublications":[],"authors":[{"id":546702863,"identity":"89ad7200-2344-4526-9274-f6ce4fa809ac","order_by":0,"name":"Nicolas DJOB LI NGUE BIKOB","email":"data:image/png;base64,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","orcid":"","institution":"","correspondingAuthor":true,"prefix":"","firstName":"Nicolas","middleName":"DJOB LI NGUE","lastName":"BIKOB","suffix":""}],"badges":[],"createdAt":"2025-11-07 19:38:04","currentVersionCode":1,"declarations":"","doi":"10.21203/rs.3.rs-8059818/v1","doiUrl":"https://doi.org/10.21203/rs.3.rs-8059818/v1","draftVersion":[],"editorialEvents":[],"editorialNote":"","failedWorkflow":false,"files":[{"id":96789799,"identity":"44c5c59c-1744-40e7-b362-568fce291cec","added_by":"auto","created_at":"2025-11-26 06:46:19","extension":"json","order_by":0,"title":"","display":"","copyAsset":false,"role":"acdc-reference","size":2928,"visible":true,"origin":"","legend":"","description":"","filename":"cdb5c41cf338466fb098c01c7f8998a7.json","url":"https://assets-eu.researchsquare.com/files/rs-8059818/v1/433375f858bcfd106a9bb1e2.json"},{"id":98822734,"identity":"896921de-c1b9-4647-95d4-8b6ab008e11d","added_by":"auto","created_at":"2025-12-22 17:39:06","extension":"pdf","order_by":1,"title":"","display":"","copyAsset":false,"role":"manuscript-pdf","size":492385,"visible":true,"origin":"","legend":"","description":"","filename":"chap1subitpf.pdf","url":"https://assets-eu.researchsquare.com/files/rs-8059818/v1_covered_deb601aa-bfad-43f2-942e-f2a2b003a3d7.pdf"}],"financialInterests":"No competing interests reported.","formattedTitle":"Resource Allocation and Tariff Strategies: Rethinking VAT in the Context of Monopolistic Competition.\\thanks{This research has been conducted as part of the project Labex MME-DII (ANR11-LBX-0023-01). Declarations of interest: None.}","fulltext":[],"fulltextSource":"","fullText":"","funders":[],"hasAdminPriorityOnWorkflow":false,"hasManuscriptDocX":false,"hasOptedInToPreprint":true,"hasPassedJournalQc":"","hasAnyPriority":false,"hideJournal":true,"highlight":"","institution":"","isAcceptedByJournal":false,"isAuthorSuppliedPdf":true,"isDeskRejected":"","isHiddenFromSearch":false,"isInQc":false,"isInWorkflow":false,"isPdf":true,"isPdfUpToDate":true,"isWithdrawnOrRetracted":false,"journal":{"display":true,"email":"[email protected]","identity":"researchsquare","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":true,"externalIdentity":"","sideBox":"","snPcode":"","submissionUrl":"/submission","title":"Research Square","twitterHandle":"researchsquare","acdcEnabled":true,"dfaEnabled":false,"editorialSystem":"","reportingPortfolio":"","inReviewEnabled":false,"inReviewRevisionsEnabled":true},"keywords":" optimal taxation, monopolistic competition, fiscal asymetry, tariff equivalence, tax coordination, VAT","lastPublishedDoi":"10.21203/rs.3.rs-8059818/v1","lastPublishedDoiUrl":"https://doi.org/10.21203/rs.3.rs-8059818/v1","license":{"name":"CC BY 4.0","url":"https://creativecommons.org/licenses/by/4.0/"},"manuscriptAbstract":"We study optimal commodity taxation in an open economy with monopolistic competition and asymmetric fiscal capacity. In a two-country model, a supranational authority uses destination-based consumption taxes to finance public spending, correct market distortions, and redistribute across countries. We show that in the first-best, domestically produced goods are always subsidized, while cross-border tax differentials emerge based on relative labor valuations. In the second-best, when lump-sum transfers are unavailable, the optimal tax system resembles a pattern of asymmetric tariffs: goods from countries with lower marginal costs of public funds are subsidized, while more competitive trade directions are taxed. These results challenge the conventional neutrality of VAT under trade liberalization and suggest that differentiated tax treatment by origin can improve welfare. Our findings call for a reassessment of uniform VAT regimes, especially in economically asymmetric unions.","manuscriptTitle":"Resource Allocation and Tariff Strategies: Rethinking VAT in the Context of Monopolistic Competition.\\thanks{This research has been conducted as part of the project Labex MME-DII (ANR11-LBX-0023-01). Declarations of interest: None.}","msid":"","msnumber":"","nonDraftVersions":[{"code":1,"date":"2025-11-26 06:46:14","doi":"10.21203/rs.3.rs-8059818/v1","editorialEvents":[{"type":"communityComments","content":0}],"status":"published","journal":{"display":true,"email":"[email protected]","identity":"researchsquare","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":true,"externalIdentity":"","sideBox":"","snPcode":"","submissionUrl":"/submission","title":"Research Square","twitterHandle":"researchsquare","acdcEnabled":true,"dfaEnabled":false,"editorialSystem":"","reportingPortfolio":"","inReviewEnabled":false,"inReviewRevisionsEnabled":true}}],"origin":"","ownerIdentity":"8cf8b8f2-ac9b-4092-b6d5-7a6ea624c3b0","owner":[],"postedDate":"November 26th, 2025","published":true,"recentEditorialEvents":[],"rejectedJournal":[],"revision":"","amendment":"","status":"posted","subjectAreas":[],"tags":[],"updatedAt":"2025-12-22T17:38:17+00:00","versionOfRecord":[],"versionCreatedAt":"2025-11-26 06:46:14","video":"","vorDoi":"","vorDoiUrl":"","workflowStages":[]},"version":"v1","identity":"rs-8059818","journalConfig":"researchsquare"},"__N_SSP":true},"page":"/article/[identity]/[[...version]]","query":{"redirect":"/article/rs-8059818","identity":"rs-8059818","version":["v1"]},"buildId":"8U1c8b4HqxoKbykW_rLl7","isFallback":false,"isExperimentalCompile":false,"dynamicIds":[84888],"gssp":true,"scriptLoader":[]}