Top Dogs, Puppy Dogs, and Tax Holidays
Why do host-country governments offer tax holidays to foreign multinational firms that establish local subsidiaries? This paper shows that a tax holiday has the effect of preventing the foreign firm from monopolizing the local market. This pro-competitive effect stems paradoxically because a tax holiday makes the multinational firm temporarily a "tougher" competitor and induces local firms to delay entry into the market. Removing the threat of imminent rivalry assures the multinational firm of greater profitability and prompts it to abandon the costly entry-deterring strategy. In contrast, a permanent and uniform tax reduction tends only to strengthen the foreign firm's incentive to monopolize the host-country market.
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- Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716.
- Judith R. Gelman & Steven C. Salop, 1983. "Judo Economics: Capacity Limitation and Coupon Competition," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 315-325, Autumn.
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- Brander, James A. & Spencer, Barbara J., 1985.
"Export subsidies and international market share rivalry,"
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Elsevier, vol. 18(1-2), pages 83-100, February.
- James A. Brander & Barbara J. Spencer, 1984. "Export Subsidies and International Market Share Rivalry," NBER Working Papers 1464, National Bureau of Economic Research, Inc.
- McAfee, R Preston & Schwartz, Marius, 1994. "Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity," American Economic Review, American Economic Association, vol. 84(1), pages 210-230, March.
- Ware, Roger, 1984. "Sunk Costs and Strategic Commitment: A Proposed Three-Stage Equilibrium," Economic Journal, Royal Economic Society, vol. 94(374), pages 370-378, June.
- Fudenberg, Drew & Tirole, Jean, 1984. "The Fat-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look," American Economic Review, American Economic Association, vol. 74(2), pages 361-366, May. Full references (including those not matched with items on IDEAS)
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