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Tax Competition, Policy Competition And The Strategic Use Of Policy Restrictions On Foreign Direct Investments

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  • KAUSHAL KISHORE

    (Department of Economic Sciences, Indian Institute of Science Education and Research Bhopal, Bhopal, Bypass Road, Bhauri, Bhopal 462066, Madhya Pradesh, India)

Abstract

In a dynamic two-period model of tax competition, where competing countries strategically choose foreign investment restrictions which increases the sunk cost of investments, we show that choosing a higher level of restriction is beneficial for the competing countries. A higher level of restriction reduces competition and increases tax revenue in the later period, which allows the government to offer large tax holidays during the initial period of investment. The result is counter-intuitive as it is widely believed that sunk cost reduces foreign direct investments. Moreover, even though competing countries are ex-ante symmetric, the equilibrium choice of the level of restrictions may not be equal.

Suggested Citation

  • Kaushal Kishore, 2021. "Tax Competition, Policy Competition And The Strategic Use Of Policy Restrictions On Foreign Direct Investments," Global Economy Journal (GEJ), World Scientific Publishing Co. Pte. Ltd., vol. 21(03), pages 1-19, September.
    • Handle: RePEc:wsi:gejxxx:v:21:y:2021:i:03:n:s2194565921500135
    DOI: 10.1142/S2194565921500135
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