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Fiscal Competition for FDI when Bidding is Costly

Author

Listed:
  • Ben Ferrett

    (Loughborough University)

  • Ian Wooton

    (University of Strathclyde)

Abstract

We introduce bidding costs into a standard model of tax/subsidy competition between two potential host countries to attract the plant of a monopoly firm. Such a bidding cost, even if it is infinitesimal, qualitatively alters the resulting equilibrium. At most one country offers fiscal inducements to the firm, and this attenuates the familiar "race to the bottom" in corporate taxes. In general, the successful host country benefits from the resulting absence of active tax/subsidy competition, at the expense of the owners of the firm in the rest of the world.

Suggested Citation

  • Ben Ferrett & Ian Wooton, 2013. "Fiscal Competition for FDI when Bidding is Costly," Economics Bulletin, AccessEcon, vol. 33(3), pages 2202-2208.
    • Handle: RePEc:ebl:ecbull:eb-13-00466
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    References listed on IDEAS

    as
    1. Joseph E. Stiglitz, 1987. "Technological Change, Sunk Costs, and Competition," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(3, Specia), pages 883-947.
    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. Ben Ferrett & Ian Wooton, 2010. "Tax competition and the international distribution of firm ownership: an invariance result," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 17(5), pages 518-531, October.
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    Cited by:

    1. Lapointe, Simon & Morand, Pierre-Henri, 2019. "Subsidy Bidding Wars and the Structure of Multi-Plant Firms," Working Papers 115, VATT Institute for Economic Research.

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    More about this item

    Keywords

    tax/subsidy competition; foreign direct investment; bidding cost; race to the bottom.;
    All these keywords.

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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