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

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

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.

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Paper provided by The Australian National University, Arndt-Corden Department of Economics in its series Departmental Working Papers with number 2013-04.

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Length: 35 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:pas:papers:2013-04
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