The evidence on international capital immobility is extensive, ranging from the correlations between domestic savings and investment pointed out by Feldstein-Horioka (1980), to real interest differentials across countries, to the lack of international portfolio diversification. To what degree does capital immobility modify past results forecasting that small open economies should not tax savings or investment? The answer depends on the cause of this immobility. We argue that asymmetric information between countries provides the most plausible explanation for the above observations. When we examine optimal tax policy in an open economy allowing for asymmetric information, rather than simply finding that savings and investment should not be taxed, we now forecast government subsidies to foreign acquisitions of domestic firms. Some omitted factors that would argue against subsidizing foreign acquisitions are explored briefly.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
4796.
Length: Date of creation: Jul 1994 Date of revision: Publication status: published as American Economic Review, vol.86, no.5, pp.1057-1075, December1996. Handle: RePEc:nbr:nberwo:4796
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Find related papers by JEL classification: D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
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