In this paper we view the tax schedule applied to the profits of a Multinational Enterprise (MNE) as the outcome of a sequential bargaining process and show, using modern game theory developments (the "perfect equilibrium" solution concept) that tax holidays will emerge from such a process if a MNE incurs fixed costs upon entry. At the core of our results is the recognition that the existence of sunk costs creates an ex post (entry) bilateral monopoly situation. We show that the tax rate emerging from this form of bargaining has a dynamic structure. We obtain results on the length and discounted value of the tax holiday, its precise form and the way all this responds to changes in fixed costs.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Publisher Info
Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
25.
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)
King, Ian & McAfee, R. Preston & Welling, Linda., 1990.
"Industrial Blackmail of Local Governments,"
Working Papers
739, California Institute of Technology, Division of the Humanities and Social Sciences.
[Downloadable!]