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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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File URL: https://crawford.anu.edu.au/acde/publications/publish/papers/wp2013/wp_econ_2013_04.pdf
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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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  1. Kessing, Sebastian G. & Konrad, Kai A. & Kotsogiannis, Christos, 2009. "Federalism, weak institutions and the competition for foreign direct investment," Munich Reprints in Economics 22086, University of Munich, Department of Economics.
  2. Kanbur, Ravi & Keen, Michael, 1993. "Jeux Sans Frontieres: Tax Competition and Tax Coordination When Countries Differ in Size," American Economic Review, American Economic Association, vol. 83(4), pages 877-92, September.
  3. Trond Olsen & Petter Osmundsen, 2000. "Strategic Tax Competition; Implications of National Ownership," CESifo Working Paper Series 281, CESifo Group Munich.
  4. Edwards, Jeremy & Keen, Michael, 1996. "Tax competition and Leviathan," European Economic Review, Elsevier, vol. 40(1), pages 113-134, January.
  5. Yang, Yong, 1996. "Tax competition under the threat of capital flight," Economics Letters, Elsevier, vol. 53(3), pages 323-329, December.
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  7. Chris Doyle & Sweder Wijnbergen, 1994. "Taxation of foreign multinationals: A sequential bargaining approach to tax holidays," International Tax and Public Finance, Springer, vol. 1(3), pages 211-225, October.
  8. Janeba, Eckhard, 1998. "Tax competition in imperfectly competitive markets," Journal of International Economics, Elsevier, vol. 44(1), pages 135-153, February.
  9. Michael Keen & Christos Kotsogiannis, 2003. "Leviathan and Capital Tax Competition in Federations," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(2), pages 177-199, 04.
  10. King, I. & McAfee, R.P. & Welling, L., 1990. "Industrial Blackmail," Papers 130, Calgary - Department of Economics.
  11. Bond, Eric W & Samuelson, Larry, 1986. "Tax Holidays as Signals," American Economic Review, American Economic Association, vol. 76(4), pages 820-26, September.
  12. Haufler, Andreas, 1998. "Asymmetric commodity tax competition -- comment on de Crombrugghe and Tulkens," Journal of Public Economics, Elsevier, vol. 67(1), pages 135-144, January.
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