Does Tax Competition Make Mobile Firms More Footloose?

28 Pages Posted: 13 Jun 2016

See all articles by Ben Ferrett

Ben Ferrett

Loughborough University

Andreas Hoefele

Loughborough University (GEP)

Ian Wooton

University of Strathclyde - Department of Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: June 2016

Abstract

Existing analyses of fiscal competition for foreign direct investment (FDI) often assume a one-shot interaction between governments and the firm within a static environment where the firm makes a permanent location choice. We examine a two-period regional model where economic geography evolves, giving the firm an incentive to relocate between periods. Government competition for FDI leads the firm to make efficient location choices, with relocation "more likely" in the presence of international tax competition, because the winning country's bid absorbs some of the firm's relocation costs. With more time periods, tax competition induces firm relocation sooner than in its absence.

Keywords: dynamic fiscal competition, efficiency, FDI, geographical change

JEL Classification: F23, H25, R38

Suggested Citation

Ferrett, Ben and Hoefele, Andreas and Wooton, Ian, Does Tax Competition Make Mobile Firms More Footloose? (June 2016). CEPR Discussion Paper No. DP11325, Available at SSRN: https://ssrn.com/abstract=2795088

Ben Ferrett (Contact Author)

Loughborough University ( email )

School of Business and Economics
Loughborough University
Loughborough, LE11 3TU
Great Britain

Andreas Hoefele

Loughborough University (GEP) ( email )

Ashby Road
Nottingham NG1 4BU
Great Britain

Ian Wooton

University of Strathclyde - Department of Economics ( email )

Sir William Duncan Building
130 Rottenrow
Glasgow G4 0GE
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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