Research on improvement strategies for low-carbon technology innovation based on a differential game: The perspective of tax competition

Under China's tax reform, the central government is given legislative power to determine taxes, while tax implementation and revenue rights are vested in local governments. The actual tax rate can be controlled by local governments through factors such as the intensity of tax implementation and supervision. We argue that the distorted implementation of an environmental regulation policy caused by tax competition is an important factor affecting the effectiveness of environmental regulation, which is the main cause of uncertainty in the relationship between environmental regulation and low-carbon technology innovation through changing the strategies of local governments and enterprises under the restriction of environmental regulation. Considering the impact of tax competition, this study builds a differential game model that consists of a local government and an enterprise to investigate the equilibrium solutions under different decision-making modes and analyse the roles of income tax and a low-carbon technology innovation reward. The following key insights are obtained. (i) In addition to the direct effects of tax competition on green technology innovation through influencing the enterprise's low-carbon technology innovation effort, it has indirect effects on green technology innovation by influencing the local government's environmental governance effort under the constraint of environmental regulation. Through the effective control of income taxes and low-carbon technology innovation rewards, tax competition can help improve the strategies of local governments and enterprises. (ii) The decision-making mode with cost sharing is a kind of Pareto improvement for the regional low-carbon technology stock if the cost sharing coefficient is effectively controlled. (iii) The enterprise can be motivated by the cost sharing contract to increase its low-carbon technology innovation effort, which is conducive to improving its optimal profit. (iv) The local government cannot be motivated by the cost sharing contract, and its optimal profit can be improved only if the cost sharing coefficient is below the threshold. (C) 2021 Institution of Chemical Engineers. Published by Elsevier B.V. All rights reserved.

Automated summary

Tax competition has both direct and indirect effects on green technology innovation, by influencing both enterprise's effort and local government's governance under environmental regulation constraint. Effective control of income taxes and low-carbon technology innovation rewards through tax competition can improve strategies. Cost sharing decision-making mode can be a Pareto improvement for regional low-carbon technology stock with effective control of the cost sharing coefficient.