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Optimal tax policy and foreign direct investment under ambiguity


  • Asano, Takao


We analyze the optimal timing of an irreversible foreign direct investment by a foreign firm and the optimal tax policy by a host country under ambiguity. We derive the optimal GDP level at which the foreign firm switches from exporting to a foreign direct investment. Furthermore, we derive the optimal tax policy by the host country, and analyze the effect of an increase in ambiguity on the optimal tax policy. We show that the host country should reduce the optimal corporate tax rate from the host government's perspective in response to an increase in ambiguity. Our result is different from the one obtained by Pennings (2005) that shows that an increase in risk induces an increase in the optimal corporate tax rate.

Suggested Citation

  • Asano, Takao, 2010. "Optimal tax policy and foreign direct investment under ambiguity," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 185-200, March.
  • Handle: RePEc:eee:jmacro:v:32:y:2010:i:1:p:185-200

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    References listed on IDEAS

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    6. Nishimura, Kiyohiko G. & Ozaki, Hiroyuki, 2007. "Irreversible investment and Knightian uncertainty," Journal of Economic Theory, Elsevier, vol. 136(1), pages 668-694, September.
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    8. Zengjing Chen & Larry Epstein, 2002. "Ambiguity, Risk, and Asset Returns in Continuous Time," Econometrica, Econometric Society, vol. 70(4), pages 1403-1443, July.
    9. Klibanoff, Peter & Marinacci, Massimo & Mukerji, Sujoy, 2009. "Recursive smooth ambiguity preferences," Journal of Economic Theory, Elsevier, vol. 144(3), pages 930-976, May.
    10. Blanchard, Olivier J, 1981. "Output, the Stock Market, and Interest Rates," American Economic Review, American Economic Association, vol. 71(1), pages 132-143, March.
    11. Mackie-Mason, Jeffrey K., 1990. "Some nonlinear tax effects on asset values and investment decisions under uncertainty," Journal of Public Economics, Elsevier, vol. 42(3), pages 301-327, August.
    12. Takao Asano, 2010. "Precautionary Principle and the Optimal Timing of Environmental Policy Under Ambiguity," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 47(2), pages 173-196, October.
    13. Buckley, Peter J & Casson, Mark, 1981. "The Optimal Timing of a Foreign Direct Investment," Economic Journal, Royal Economic Society, vol. 91(361), pages 75-87, March.
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    Cited by:

    1. Lenka Janíčková & Veronika Baranová, 2013. "Vliv efektivních daňových sazeb a jejich komponent na přímé zahraniční investice - případ členských zemí EU
      [Impact of Effective Tax Rates and Its Components on Foreign Direct Investment - The Case
      ," Politická ekonomie, University of Economics, Prague, vol. 2013(2), pages 209-228.
    2. Takanori Adachi & Takao Asano, 2011. "Entrepreneurial Choice and Knightian Uncertainty with Borrowing Constraints," KIER Working Papers 803, Kyoto University, Institute of Economic Research.
    3. Instefjord, Norvald & Nawosah, Vivekanand & Yang, Pei, 2016. "A contingent claims analysis of optimal investment subsidy," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 354-372.
    4. Asano, Takao & Shibata, Akihisa, 2011. "Optimal pricing and quality choice of a monopolist under Knightian uncertainty," International Journal of Industrial Organization, Elsevier, vol. 29(6), pages 746-754.


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