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Country size and tax competition for foreign direct investment

Listed author(s):
  • Haufler, Andreas
  • Wooton, Ian

We analyse tax competition between two countries of unequal size trying to attract a foreign-owned monopolist. When national governments have only a lump-sum profit tax (subsidy) at their disposal, but face exogenous and identical transport costs for imports, then both countries will be willing to offer a subsidy to the firm. At the same time, the firm prefers to locate in the larger market where it will be able to charge a higher producer price. In equilibrium the large country receives the investment and may even be able to charge a positive tax, if the difference in the sizes of the national markets is sufficiently great. The profit tax paid in equilibrium rises further if countries are given an additional instrument of either a tariff or a consumption tax.

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Paper provided by University of Munich, Department of Economics in its series Munich Reprints in Economics with number 20408.

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Date of creation: 1999
Publication status: Published in Journal of Public Economics 1 71(1999): pp. 121-139
Handle: RePEc:lmu:muenar:20408
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