Fiscal Competition for FDI when Bidding is Costly

Ben Ferrett and Ian Wooton ()

Discussion Paper Series from Department of Economics, Loughborough University

Abstract: We introduce bidding costs into a standard model of tax/subsidy competition between two potential host countries to attract a monopoly firm’s plant. 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 firm’s owners in the rest of the world.

Date: 2013-06, Revised 2013-06
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Journal Article: Fiscal Competition for FDI when Bidding is Costly (2013)
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