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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 & International Institute of Public Finance 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
DOI: 10.1007/s10797-006-6553-y
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  1. 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.
  2. Paolo M. Panteghini, 2003. "A dynamic measure of the effective tax rate," Economics Bulletin, AccessEcon, vol. 8(15), pages 1-7.
  3. Paolo Panteghini & Guttorm Schjelderup, 2003. "Competing for Foreign Direct Investments: A Real Options Approach," CESifo Working Paper Series 929, CESifo Group Munich.
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