Fiscal competition for FDI when bidding is costly

2016-12-07T14:25:39Z (GMT) by Ben Ferrett Ian Wooton
We introduce bidding costs into a standard model of tax/subsidy competition between two potential host countries to attract the plant of a monopoly firm. Such a bidding cost, even if it is infinitesimal, qualitatively alters the resulting equilibrium. At most one country offers fiscal inducements to the firm, and this attenuates the familiar "race to the bottom" in corporate taxes. In general, the successful host country benefits from the resulting absence of active tax/subsidy competition, at the expense of the owners of the firm in the rest of the world.

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CC BY-NC-ND 4.0