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Fiscal Federalism and Competitive Bidding for Foreign Investment as a Multistage Game

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  • Raghbendra Jha
  • Hari K. Nagarajan
  • Kolumum R. Nagarajan

Abstract

This paper models the behavior of states in a federal country wising to attract foreign firms to locate within their own individual jurisdictions. The essential intertemporal character of this decision is modeled as a multi-stage game to attract such foreign investment in these states. It is found that, when states with unequal political or economic infrastructure compete, the resulting Nash equilibrium profiles are inefficient. Under certain conditions, states that have won once, can “allow†a rival to win in a subsequent stage. The resulting Nash Equilibrium is more efficient. If the option of “allowing†a rival to win is not available, then states may resort to “suicide†strategies defined as outcomes created by history of losses.

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File URL: https://crawford.anu.edu.au/acde/publications/publish/papers/wp2013/wp_econ_2013_04.pdf
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Bibliographic Info

Paper provided by The Australian National University, Arndt-Corden Department of Economics in its series Departmental Working Papers with number 2013-04.

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Length: 35 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:pas:papers:2013-04

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Keywords: Fiscal Federalism; Multi stage games; suicide strategies.;

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  1. Edwards, Jeremy & Keen, Michael, 1996. "Tax competition and Leviathan," European Economic Review, Elsevier, vol. 40(1), pages 113-134, January.
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  4. Janeba, Eckhard, 1998. "Tax competition in imperfectly competitive markets," Journal of International Economics, Elsevier, vol. 44(1), pages 135-153, February.
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  7. Lorz, Jens Oliver, 1996. "Capital mobility, tax competition, and lobbying for redistributive capital taxation," Kiel Working Papers 779, Kiel Institute for the World Economy.
  8. Doyle, Christopher & van Wijnbergen, Sweder, 1984. "Taxation of Foreign Multinationals: A Sequential Bargaining Approach to Tax Holidays," CEPR Discussion Papers 25, C.E.P.R. Discussion Papers.
  9. Bond, Eric W & Samuelson, Larry, 1986. "Tax Holidays as Signals," American Economic Review, American Economic Association, vol. 76(4), pages 820-26, September.
  10. Yang, Yong, 1996. "Tax competition under the threat of capital flight," Economics Letters, Elsevier, vol. 53(3), pages 323-329, December.
  11. King, I. & McAfee, R.P. & Welling, L., 1990. "Industrial Blackmail," Papers 130, Calgary - Department of Economics.
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