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An auction theoretical approach to fiscal wars

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  • Flavio M. Menezes

    (Australian National University, School of Economics, Canberra, ACT, 0200, Australia and EPGE/FGV)

Abstract

I examine a situation where a firm chooses to locate a new factory in one of several jurisdictions. The value of the factory may differ among jurisdictions and it depends on the private information held by each jurisdiction. Jurisdictions compete for the location of the new factory. This competition may take the form of expenditures already incurred on infrastructure, commitments to spend on infrastructure, tax incentives or even cash payments. The model combines two elements that are usually considered separately; competition is desirable because we want the factory to be located in the jurisdiction that values it the most, but competition in itself is wasteful. I show that the expected total amount paid to the firm under a large family of arrangements is the same. Moreover, I show that the ex-ante optimal mechanism - that is, the mechanism that guarantees that the firm chooses the jurisdiction with the highest value for the factory, minimizes the total expected payment to the firm, and balances the budget in an ex-ante sense - can be implemented by running a standard auction and subsidizing participation.

Suggested Citation

  • Flavio M. Menezes, 2003. "An auction theoretical approach to fiscal wars," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 20(1), pages 155-166.
    • Handle: RePEc:spr:sochwe:v:20:y:2003:i:1:p:155-166
    Note: Received: 6 December 2000/Accepted: 18 February 2002
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    Cited by:

    1. Kai Konrad, 2008. "Mobile tax base as a global common," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 15(4), pages 395-414, August.
    2. Osiris Jorge Parcero, 2024. "Optimal National policies towards multinationals when local regions can choose between firm-specific and non-firm-specific policies," Papers 2401.04243, arXiv.org.
    3. Ben Ferrett & Ian Wooton, 2010. "Competing for a duopoly: international trade and tax competition," Canadian Journal of Economics, Canadian Economics Association, vol. 43(3), pages 776-794, August.
    4. Emiel Maasland & Sander Onderstal, 2006. "Going, Going, Gone! A Swift Tour of Auction Theory and its Applications," De Economist, Springer, vol. 154(2), pages 197-249, June.
    5. Alcalde, José & Dahm, Matthias, 2008. "The Complete Information First. Price Auction or the Importance of Being Indivisible," Working Papers 2072/13264, Universitat Rovira i Virgili, Department of Economics.

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