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To Invest or not to Invest: A real options approach to FDIs and tax competition

  • Paolo Panteghini

    ()

  • Guttorm Schjelderup

    ()

Foreign investment decisions of firms are often characterized by investment irreversibility, uncertainty, and the ability to choose the optimal timing of foreign investments. We embed these characteristics into a real option theory framework to analyze international competition among countries to attract mobile investments when firms, after the investment is sunk, can shift profit to low tax countries by transfer pricing. We find that an increase in the uncertainty of profit income reduces the equilibrium tax rates, whilst lower investment costs or larger profits, counteracts the negative fiscal externality of tax competition leading to higher equilibrium tax rates. Copyright Springer Science + Business Media, LLC 2006

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File URL: http://hdl.handle.net/10.1007/s10797-006-6553-y
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Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 13 (2006)
Issue (Month): 6 (November)
Pages: 643-660

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Handle: RePEc:kap:itaxpf:v:13:y:2006:i:6:p:643-660
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=102915

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  1. Paolo M. Panteghini, 2003. "A dynamic measure of the effective tax rate," Economics Bulletin, AccessEcon, vol. 8(15), pages 1-7.
  2. Hans Jarle Kind & Helene Midelfart & Guttorm Schjelderup, 2004. "Corporate Tax Systems, Multinational Enterprises, and Economic Integration," CESifo Working Paper Series 1241, CESifo Group Munich.
  3. Haufler, Andreas & Schjelderup, Guttorm, 1999. "Corporate taxation, profit shifting, and the efficiency of public input provision," Center for European, Governance and Economic Development Research Discussion Papers 4, University of Goettingen, Department of Economics.
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  17. Paolo Panteghini & Guttorm Schjelderup, 2003. "Competing for Foreign Direct Investments: A Real Options Approach," CESifo Working Paper Series 929, CESifo Group Munich.
  18. Michael Keen, 1993. "The welfare economics of tax co-ordination in the European Community : a survey," Fiscal Studies, Institute for Fiscal Studies, vol. 14(2), pages 15-36, February.
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