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Targeted Transfers, Investment Spillovers, and the Tax Environment

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  • Lynne Pepall
  • Daniel Richards

Abstract

We examine the informational role of targeted tax transfers used by local governments to attract corporate investment projects. The transfer may potentially be used to solve an information externality in which subsequent investments that follow the initial project may fail to occur even though they are profitable. The targeted transfer may be used to signal the profitability of such ancillary investments and thereby attract them. We show that this signaling role implies that an environment of either generally high corporate tax rates or low gains from secondary investments paradoxically yields an equilibrium in which the necessary government subsidy is lower.

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Bibliographic Info

Paper provided by Department of Economics, Tufts University in its series Discussion Papers Series, Department of Economics, Tufts University with number 0702.

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Date of creation: 2007
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Handle: RePEc:tuf:tuftec:0702

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Keywords: taxes; transfers; externalities;

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  1. Michael Greenstone & Enrico Moretti, 2003. "Bidding for Industrial Plants: Does Winning a 'Million Dollar Plant' Increase Welfare?," NBER Working Papers 9844, National Bureau of Economic Research, Inc.
  2. Rodrik, Dani, 2004. "Industrial Policy for the Twenty-First Century," CEPR Discussion Papers 4767, C.E.P.R. Discussion Papers.
  3. John J. Siegfried & Andrew Zimbalist, 2000. "The Economics of Sports Facilities and Their Communities," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 95-114, Summer.
  4. Henderson, J. Vernon, 2003. "Marshall's scale economies," Journal of Urban Economics, Elsevier, vol. 53(1), pages 1-28, January.
  5. Black, Dan A & Hoyt, William H, 1989. "Bidding for Firms," American Economic Review, American Economic Association, vol. 79(5), pages 1249-56, December.
  6. Gordon H. HANSON, 2001. "Should Countries Promote Foreign Direct Investment?," G-24 Discussion Papers 9, United Nations Conference on Trade and Development.
  7. Stephen R. Yeaple & Wolfgang Keller, 2003. "Multinational Enterprises, International Trade, and Productivity Growth," IMF Working Papers 03/248, International Monetary Fund.
  8. Holger Görg & David Greenaway, 2004. "Much Ado about Nothing? Do Domestic Firms Really Benefit from Foreign Direct Investment?," World Bank Research Observer, World Bank Group, vol. 19(2), pages 171-197.
  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. Pepall, Lynne, 1990. "Market Demand and Product Clustering," Economic Journal, Royal Economic Society, vol. 100(399), pages 195-205, March.
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