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Does tax competition make mobile firms more footloose?

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  • Ben Ferrett
  • Andreas Hoefele
  • Ian Wooton

Abstract

We examine a two-period regional model with evolving economic geography, potentially creating incentives for firm relocation between periods. We argue that tax competition makes firms more footloose, but that this increases efficiency relative to the laissez-faire outcome. We establish that: (i) tax competition leads to efficient investment outcomes and (ii) firm mobility is greater with tax competition than with a laissez-faire regime. When relocation is costly, there can be too little mobility over time, as firms do not take into account the impact of FDI on social welfare in each country. With lump-sum taxes or transfers, firms capture these benefits and internalize them, such that tax competition leads to the efficient outcomes. When more time periods are examined, tax competition induces firm relocation sooner than in its absence.

Suggested Citation

  • Ben Ferrett & Andreas Hoefele & Ian Wooton, 2019. "Does tax competition make mobile firms more footloose?," Canadian Journal of Economics, Canadian Economics Association, vol. 52(1), pages 379-402, February.
  • Handle: RePEc:cje:issued:v:52:y:2019:i:1:p:379-402
    DOI: 10.1111/caje.12375
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    References listed on IDEAS

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    1. Konrad, Kai A. & Kovenock, Dan, 2009. "Competition for FDI with vintage investment and agglomeration advantages," Journal of International Economics, Elsevier, vol. 79(2), pages 230-237, November.
    2. Haufler, Andreas & Wooton, Ian, 1999. "Country size and tax competition for foreign direct investment," Journal of Public Economics, Elsevier, vol. 71(1), pages 121-139, January.
    3. Konrad, Kai A. & Kovenock, Dan, 2009. "Competition for FDI with vintage investment and agglomeration advantages," Journal of International Economics, Elsevier, vol. 79(2), pages 230-237, November.
    4. King, Ian & Welling, Linda, 1992. "Commitment, Efficiency and Footloose Firms," Economica, London School of Economics and Political Science, vol. 59(233), pages 63-73, February.
    5. Timothy Besley & Paul Seabright, 1999. "The effects and policy implications of state aids to industry: an economic analysis," Economic Policy, CEPR;CES;MSH, vol. 14(28), pages 13-53, April.
    6. Ian King & R. Preston McAfee & Linda Welling, 1993. "Industrial Blackmail: Dynamic Tax Competition and Public Investment," Canadian Journal of Economics, Canadian Economics Association, vol. 26(3), pages 590-608, August.
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    Cited by:

    1. Nora Paulus & Patrice Pieretti & Benteng Zou, 2018. "Tax Competition - An intertemporal perspective," CREA Discussion Paper Series 18-10, Center for Research in Economic Analysis, University of Luxembourg.

    More about this item

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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