Biased manager aggressiveness, understated profits, tax pass-through, and tax incidence in a differentiated duopoly

Abstract

In this paper, we examine the findings on tax pass-through and tax incidence in a differentiated duopoly when the owner of each firm hires a biased manager. We first show that irrespective of the mode of product market competition, the tax pass-through and tax incidence are higher when owners hire biased managers compared to the case of no delegation. We then consider the issue of tax pass-through and tax incidence when the owners understate the profit to lower the tax liability. Surprisingly, we find that when firms understate their profit, hiring biased managers further amplifies the tax pass-through and tax incidence under an ad valorem tax. However, the results remain the same under specific taxes.