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Optimal country's policy towards multinationals when local regions can choose between firm-specific and non-firm-specific policies

  • Osiris J. Parcero

    ()

    (United Arab Emirates University)

This paper looks at a county’s central government optimal policy in a setting where its two identical local regions compete for the attraction of footloose multinationals to their sites, and where the considered multinationals strictly prefer this country to the rest of the world. For the sake of reality the model allows the local regions to choose between the implementation of firm-specific and non-firm-specific policies. We find that, even though the two local regions are identical, some degree of regional tax competition is good for country’s welfare. Moreover, we show that the implementation of the regional firmspecific policies weakly welfare dominates the implementation of the regional non-firmspecific ones. Hence the not infrequent calls for the central government to ban the former type of policies go against the advice of this paper.

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File URL: http://ieb.ub.edu/aplicacio/fitxers/2009/10/Doc2009-34.pdf
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Paper provided by Institut d'Economia de Barcelona (IEB) in its series Working Papers with number 2009/34.

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Length: 37 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:ieb:wpaper:2009/10/doc2009-34
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  1. Han, Seungjin & Leach, John, 2008. "A bargaining model of tax competition," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1122-1141, June.
  2. Haufler, Andreas & Wooton, Ian, 2001. "Regional Tax Coordination and Foreign Direct Investment," CEPR Discussion Papers 3063, C.E.P.R. Discussion Papers.
  3. Bond, Eric W & Samuelson, Larry, 1986. "Tax Holidays as Signals," American Economic Review, American Economic Association, vol. 76(4), pages 820-26, September.
  4. C. Dembour, 2008. "Competition for Business Location: A Survey," Journal of Industry, Competition and Trade, Springer, vol. 8(2), pages 89-111, June.
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  9. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 661465000000000387, David K. Levine.
  10. Bolton, Patrick & Whinston, Michael D, 1993. "Incomplete Contracts, Vertical Integration, and Supply Assurance," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 121-48, January.
  11. Zodrow, George R. & Mieszkowski, Peter, 1986. "Pigou, Tiebout, property taxation, and the underprovision of local public goods," Journal of Urban Economics, Elsevier, vol. 19(3), pages 356-370, May.
  12. repec:cup:cbooks:9780521576475 is not listed on IDEAS
  13. Bjorvatn, Kjetil & Eckel, Carsten, 2006. "Policy competition for foreign direct investment between asymmetric countries," Munich Reprints in Economics 20270, University of Munich, Department of Economics.
  14. Barros, Pedro P & Cabral, Luis, 2000. "Competing for Foreign Direct Investment," Review of International Economics, Wiley Blackwell, vol. 8(2), pages 360-71, May.
  15. Kristian Behrens & Pierre M. Picard, 2008. "Bidding for Horizontal Multinationals," Journal of the European Economic Association, MIT Press, vol. 6(6), pages 1244-1278, December.
  16. Michael J. Keen & Christos Kotsogiannis, 2002. "Does Federalism Lead to Excessively High Taxes?," American Economic Review, American Economic Association, vol. 92(1), pages 363-370, March.
  17. Wang, Ruqu, 1995. "Bargaining versus posted-price selling," European Economic Review, Elsevier, vol. 39(9), pages 1747-1764, December.
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