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Fiscal Competition for FDI when Bidding is Costly

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  • Ben Ferrett

    (School of Business and Economics, Loughborough University, UK)

  • Ian Wooton

    (University of Strathclyde, UK)

Abstract

We introduce bidding costs into a standard model of tax/subsidy competition between two potential host countries to attract a monopoly firm’s plant. Such a bidding cost, even if it is infinitesimal, qualitatively alters the resulting equilibrium. At most one country offers fiscal inducements to the firm, and this attenuates the “familiar race to the bottom” in corporate taxes. In general, the successful host country benefits from the resulting absence of active tax/subsidy competition, at the expense of the firm’s owners in the rest of the world.

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File URL: http://www.lboro.ac.uk/departments/sbe/RePEc/lbo/lbowps/Ferrett_WP2013_04.pdf
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Bibliographic Info

Paper provided by Department of Economics, Loughborough University in its series Discussion Paper Series with number 2013_04.

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Date of creation: Jun 2013
Date of revision: Jun 2013
Handle: RePEc:lbo:lbowps:2013_04

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  1. Ben Ferrett & Ian Wooton, 2010. "Tax competition and the international distribution of firm ownership: an invariance result," International Tax and Public Finance, Springer, vol. 17(5), pages 518-531, October.
  2. Haufler, Andreas & Wooton, Ian, 1999. "Country size and tax competition for foreign direct investment," Journal of Public Economics, Elsevier, vol. 71(1), pages 121-139, January.
  3. Haufler, Andreas & Wooton, Ian, 1999. "Country size and tax competition for foreign direct investment," Munich Reprints in Economics 20408, University of Munich, Department of Economics.
  4. Joseph E. Stiglitz, 1987. "Technological Change, Sunk Costs, and Competition," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(3), pages 883-947.
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