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Competing for a duopoly: international trade and tax competition

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  • Ben Ferrett
  • Ian Wooton

Abstract

We analyse the tax/subsidy competition between two potential host governments to attract the plants of firms in a duopolistic industry. While competition between identical countries for a monopolist's investment is known to result in subsidy inflation, two firms can be taxed in equilibrium with the host countries appropriating the entire social surplus generated within the industry, despite explicit non-cooperation between governments. Trade costs mean that the firms prefer dispersed to co-located production, creating these taxation opportunities for the host countries. We determine the country-size asymmetry that changes the nature of the equilibrium, inducing concentration of production in the larger country.

Suggested Citation

  • Ben Ferrett & Ian Wooton, 2010. "Competing for a duopoly: international trade and tax competition," Canadian Journal of Economics, Canadian Economics Association, vol. 43(3), pages 776-794, August.
    • Handle: RePEc:cje:issued:v:43:y:2010:i:3:p:776-794
    DOI: 10.1111/j.1540-5982.2010.01594.x
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    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects

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