Cross‐Border Ownership and Strategic Interaction in Commodity Taxation

ABSTRACT

This paper studies how asymmetric bilateral cross‐border ownership shapes commodity taxation under the destination and origin principles in a two‐country Cournot model. Under destination taxation, each country's tax affects only its own market, so governments' tax choices remain strategically independent; under origin taxation, each tax affects firm activity in both markets, creating strategic interaction. Ownership affects national welfare through profit redistribution and the tax responses it induces. In the linear‐demand benchmark, sufficiently asymmetric ownership can make one government regard the other country's tax as a strategic complement while the other regards its counterpart as a strategic substitute. Under origin taxation, greater domestic ownership share of the foreign firm can reduce home welfare despite increasing the foreign profit income accruing to home residents, because the adverse strategic tax response can outweigh this direct gain. Cross‐border ownership can also reverse the welfare comparison between the two tax principles: without cross‐border ownership, the origin‐based Nash equilibrium implements the cooperative allocation, whereas sufficiently extensive bilateral ownership can make destination taxation yield higher joint welfare.