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Bidding for Horizontal Multinationals

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  • Kristian Behrens
  • Pierre M. Picard

Abstract

We present a model in which governments bid for firms by taxing/subsidizing setup costs. Firms choose both the number and the location of the plants they operate, and the equilibrium industry structure is affected by governments' subsidy choices. We show that the endogenous presence of horizontal multinationals attenuates the race to the bottom and yields some results that run counter to traditional findings in the literature. First, in the presence of multinationals, increasing subsidies decrease firms' profits by exacerbating price competition due to more firms going multinational. Second, instead of being always subsidized, firms may actually be taxed in equilibrium. Last, subsidies may become strategically independent policy instruments, instead of being strategic complements. (JEL: F12, F23, H27, H73, R12) (c) 2008 by the European Economic Association.

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Bibliographic Info

Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 6 (2008)
Issue (Month): 6 (December)
Pages: 1244-1278

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Handle: RePEc:tpr:jeurec:v:6:y:2008:i:6:p:1244-1278

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Cited by:
  1. Osiris J. Parcero, 2009. "Optimal country's policy towards multinationals when local regions can choose between firm-specific and non-firm-specific policies," Working Papers 2009/34, Institut d'Economia de Barcelona (IEB).
  2. Pierre Blanchard & Carl Gaigné & Claude Mathieu, 2012. "Trade Costs and International Strategy of Firms: the Role of Endogenous Product Differentiation," Cahiers de recherche CREATE 2012-2, CREATE.
  3. Amerighi, Oscar & Peralta, Susana, 2010. "The proximity-concentration trade-off with profit shifting," Journal of Urban Economics, Elsevier, vol. 68(1), pages 90-101, July.
  4. Nils Herger & Christos Kotsogiannis & Steve McCorriston, 2011. "International Taxation and FDI Strategies: Evidence From US Cross-Border Acquisitions," Discussion Papers 1109, Exeter University, Department of Economics.
  5. Pierre Blanchard & Carl Gaigné & Claude Mathieu, 2012. "Trade costs and international strategy of firms: the role of endogenous product differentiation," Working Papers 171833, Institut National de la Recherche Agronomique, France.
  6. O. Amerighi & S. Peralta, 2007. "Exports Versus Horizontal Foreign Direct Investment with Profit Shifting," Working Papers 604, Dipartimento Scienze Economiche, Universita' di Bologna.

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