Fiscal policy for disaster risk management and international externality

This study investigates an influence of catastrophic damage caused by natural disaster on international market. In case a large country in the world economy is damaged, fiscal policies for recovery from disaster vary rates of return in international capital market and consequently affect consumption and investment behavior of households even undamaged countries. This study formulates an overlapping-generation-model, which contains two counties, to investigate international externality in dynamic reconstruction process and strategic tax policies adopted by two national governments in the market where source-based taxation rule is applied. The government of the damaged country is motivated to discount tax rates on capital income in order to attract international capital, causing outflow of capital from the undamaged country. The study further investigates the tax-subsidy policies by the government of the undamaged country to mitigate the negative externality, and refers to possibility of tax competition.