Quantitative Implications of the Home Bias: Foreign Underinvestment, Domestic Oversaving, and Corrective Taxation

Assaf Razin, Efraim Sadka and Chi-Wa Yuen

No 6339, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: There is strong evidence about a home-court advantage in international portfolio" investment. One explanation for the bias is an information asymmetry between domestic and" foreign investors about the economic performance of domestic firms. This asymmetry causes" two types of distortions: an aggregate production inefficiency and a production-consumption" inefficiency, leading to foreign underinvestment and domestic oversaving respectively. Such" market failures are found to be quite severe, slightly more so with equity flows than with debt" flows. These inefficiencies can nonetheless be corrected by a mix of tax-subsidy instruments consisting of taxes on corporate income and on the capital incomes of both residents and" nonresidents. When only a partial set of instruments is available, however each tax instrument can change radically and may even be reversed although the welfare gains" can be fairly substantial and sometimes close to the first best optimum. This partial set of" instruments appears to be more effective in handling the market failure in the case of equity" flows than in the case of debt flows.

JEL-codes: F21 (search for similar items in EconPapers)
Date: 1997-12
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.nber.org/papers/w6339.pdf (application/pdf)

Related works:
Working Paper: Quantitative Implications of the Home Bias: Foreign Underinvestment, Domestic Oversaving and Corrective Taxation (1997)
Working Paper: Quantitative Implications of the Home Bias: Foreign Underinvestment, Domestic Oversaving and Corrective Taxation (1997)
Working Paper: Quantitative Implications of the Home Bias: Foreign Underinvestment, Domestic Oversaving, and Corrective Taxation
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:6339

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w6339

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().