Foreign direct investment under fiscal interdependence when policy is set unilaterally

Luis Gautier ()
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Luis Gautier: University of Texas at Tyler

International Economics and Economic Policy, 2017, vol. 14, issue 4, No 3, 579-599

Abstract: Abstract This paper develops a partial equilibrium model of foreign direct investment to analyze the potentially opposing interests between a host and foreign country. The two countries are fiscally interdependent and the fiscal variable is set unilaterally by the foreign country. The analysis indicates that fiscal independence is welfare-enhancing, particularly in the case where the outflow of FDI is large. The case where a lump-sum subsidy is set to address the exit of firms indicates that the need for subsidy payments subside under fiscal independence.

Keywords: FDI; Unilateral policy; Caribbean basin initiative; Oligopoly; Puerto Rico (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1007/s10368-016-0358-y

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