Fiscal competition in developing countries: a survey of the theoretical and empirical literature

Thierry Madiès and Jean-Jacques Dethier

No 5311, Policy Research Working Paper Series from The World Bank

Abstract: The last two decades have witnessed a sharp increase in foreign direct investment (FDI) flows and increased competition among developing countries to attract FDI, resulting in higher investment incentives offered by host governments and removal of restrictions on operations of foreign firms in their countries. Fiscal competition between governments can take the form of business tax rebates, productivity-enhancing public infrastructure or investment incentives such as tax holidays, accelerated depreciation allowances or loss carry-forward for income tax purposes. It can take place between governments of different countries or between local governments within the same country. This paper surveys the recent theoretical and empirical economic literature on decentralization which attempts to answer three questions. First, does theoretical literature on fiscal competition and"bidding races"contribute to a better understanding of such phenomenon in developing countries? Second, are FDI inflows in developing countries sensitive to fiscal incentives and is there empirical evidence of strategic behavior from the part of developing countries in order to attract FDI? Third, what evidence is there about fiscal competition among local governments in developing countries?

Keywords: Subnational Economic Development; Debt Markets; Taxation&Subsidies; Emerging Markets; Public Sector Economics (search for similar items in EconPapers)
Date: 2010-05-01
New Economics Papers: this item is included in nep-dev and nep-pbe
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Citations: View citations in EconPapers (15)

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Related works:
Journal Article: FISCAL COMPETITION IN DEVELOPING COUNTRIES: A SURVEY OF THE THEORETICAL AND EMPIRICAL LITERATURE (2012)
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