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Fiscal Federalism and Competitive Bidding for Foreign Investment as a Multistage Game

Author

Listed:
  • Raghbendra Jha
  • Hari K. Nagarajan
  • Kolumum R. Nagarajan

Abstract

This paper models the behavior of states in a federal country wising to attract foreign firms to locate within their own individual jurisdictions. The essential intertemporal character of this decision is modeled as a multi-stage game to attract such foreign investment in these states. It is found that, when states with unequal political or economic infrastructure compete, the resulting Nash equilibrium profiles are inefficient. Under certain conditions, states that have won once, can “allow” a rival to win in a subsequent stage. The resulting Nash Equilibrium is more efficient. If the option of “allowing” a rival to win is not available, then states may resort to “suicide” strategies defined as outcomes created by history of losses.

Suggested Citation

  • Raghbendra Jha & Hari K. Nagarajan & Kolumum R. Nagarajan, 2013. "Fiscal Federalism and Competitive Bidding for Foreign Investment as a Multistage Game," Departmental Working Papers 2013-04, The Australian National University, Arndt-Corden Department of Economics.
  • Handle: RePEc:pas:papers:2013-04
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    File URL: https://crawford.anu.edu.au/acde/publications/publish/papers/wp2013/wp_econ_2013_04.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Fiscal Federalism; Multi stage games; suicide strategies.;

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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