Bidding for Horizontal Multinationals
AbstractWe 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 InfoArticle provided by MIT Press in its journal Journal of the European Economic Association.
Volume (Year): 6 (2008)
Issue (Month): 6 (December)
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Other versions of this item:
- F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
- F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
- H27 - Public Economics - - Taxation, Subsidies, and Revenue - - - Other Sources of Revenue
- H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
- R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)
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- Blanchard, Pierre & Gaigné, Carl & Mathieu, Claude, 2012.
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