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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
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    Cited by:

    1. O. Amerighi & G. De Feo, 2009. "Is Competition for FDI Bad for Regional Welfare?," Working Papers 680, Dipartimento Scienze Economiche, Universita' di Bologna.
    2. Andreas Haufler & Ferdinand Mittermaier, 2011. "Unionisation Triggers Tax Incentives to Attract Foreign Direct Investment," Economic Journal, Royal Economic Society, vol. 121(553), pages 793-818, June.
    3. Darby, Julia & Ferrett, Ben & Wooton, Ian, 2014. "Regional centrality and tax competition for FDI," Regional Science and Urban Economics, Elsevier, vol. 49(C), pages 84-92.
    4. Ma, Jie & Wooton, Ian, 2017. "Market Size, Product Differentiation and Bidding for New Varieties," CEPR Discussion Papers 11943, C.E.P.R. Discussion Papers.
    5. Hartmut Egger & Daniel Etzel, 2012. "Union Wage Setting and International Trade," IAAEU Discussion Papers 201209, Institute of Labour Law and Industrial Relations in the European Union (IAAEU).
    6. Ferdinand Mittermaier, 2007. "Subsidy competition and the role of firm ownership," Working Papers 032, Bavarian Graduate Program in Economics (BGPE).
    7. Haufler, Andreas, 2006. "Die Besteuerung multinationaler Unternehmen," Discussion Papers in Economics 1153, University of Munich, Department of Economics.
    8. Michael P. Devereux & Simon Loretz, 2013. "What Do We Know About Corporate Tax Competition?," National Tax Journal, National Tax Association, vol. 66(3), pages 745-774, September.
    9. Oscar Amerighi & Giuseppe De Feo, 2014. "Competition for FDI and Profit Shifting: On the Effects of Subsidies and Tax Breaks," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 70(3), pages 374-404, September.
    10. Ronald B. Davies & Carsten Eckel, 2010. "Tax Competition for Heterogeneous Firms with Endogenous Entry," American Economic Journal: Economic Policy, American Economic Association, vol. 2(1), pages 77-102, February.
    11. Hayato Kato & Hirofumi Okoshi, 2017. "Production Location of Multinational Firms under Transfer Pricing: The Impact of the Arm's Length Principle," Keio-IES Discussion Paper Series 2017-016, Institute for Economics Studies, Keio University.
    12. Mittermaier, Ferdinand, 2007. "Subsidy Competition and the Role of Firm Ownership," Discussion Papers in Economics 2031, University of Munich, Department of Economics.
    13. Haufler, Andreas & Wooton, Ian, 2007. "Competition for Firms in an Oligopolistic Industry: Do Firms or Countries Have to Pay?," Discussion Papers in Economics 1399, University of Munich, Department of Economics.
    14. Michael Keen & Kai A. Konrad, 2012. "International Tax Competition and Coordination," Working Papers international_tax_competi, Max Planck Institute for Tax Law and Public Finance.
    15. Ronald B. Davies & Hartmut Egger & Peter Egger, 2003. "Tax Competition for International Producers and the Mode of Foreign Market Entry," University of Oregon Economics Department Working Papers 2006-19, University of Oregon Economics Department, revised 10 Jun 2003.
    16. O. Amerighi & G. De Feo, 2007. "Competition for FDI in the Presence of a Public Firm and the Effects of Privatization," Working Papers 605, Dipartimento Scienze Economiche, Universita' di Bologna.
    17. Ferdinand Mittermaier, 2009. "The Role of Firm Ownership in Tax Competition," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 65(3), pages 297-312, September.
    18. Jun Oshiro, 2011. "Tariff Policy and Transport Costs under Reciprocal Dumping," Discussion Papers in Economics and Business 11-17, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
    19. Estelle P. Dauchy & Christopher Balding, 2013. "Asymmetric Trade Estimator in Modified Gravity: Corporate Tax Rates and Trade in OECD Countries," Working Papers w0200, Center for Economic and Financial Research (CEFIR).
    20. Kolesnik, Georgiy & Leonova, Natalia, 2011. "Исследование Равновесий Налоговой Конкуренции В Условиях Монополистической Конкуренции Налогоплательщиков
      [Tax competition equilibria analysis under taxpayers' monopolistic competition]
      ," MPRA Paper 47314, University Library of Munich, Germany.
    21. O. Amerighi & S. Peralta, 2007. "Exports Versus Horizontal Foreign Direct Investment with Profit Shifting," Working Papers 604, Dipartimento Scienze Economiche, Universita' di Bologna.

    More about this item

    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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