IDEAS home Printed from https://ideas.repec.org/a/cje/issued/v43y2010i3p776-794.html
   My bibliography  Save this article

Competing for a duopoly: international trade and tax competition

Author

Listed:
  • Ben Ferrett
  • Ian Wooton

Abstract

We analyse the tax/subsidy competition between two potential host governments to attract the plants of firms in a duopolistic industry. While competition between identical countries for a monopolist's investment is known to result in subsidy inflation, two firms can be taxed in equilibrium with the host countries appropriating the entire social surplus generated within the industry, despite explicit non-cooperation between governments. Trade costs mean that the firms prefer dispersed to co-located production, creating these taxation opportunities for the host countries. We determine the country-size asymmetry that changes the nature of the equilibrium, inducing concentration of production in the larger country.

Suggested Citation

  • Ben Ferrett & Ian Wooton, 2010. "Competing for a duopoly: international trade and tax competition," Canadian Journal of Economics, Canadian Economics Association, vol. 43(3), pages 776-794, August.
  • Handle: RePEc:cje:issued:v:43:y:2010:i:3:p:776-794
    DOI: 10.1111/j.1540-5982.2010.01594.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1540-5982.2010.01594.x
    Download Restriction: access restricted to subscribers

    File URL: https://libkey.io/10.1111/j.1540-5982.2010.01594.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Brander, James & Krugman, Paul, 1983. "A 'reciprocal dumping' model of international trade," Journal of International Economics, Elsevier, vol. 15(3-4), pages 313-321, November.
    2. Wilson, John Douglas, 1991. "Tax competition with interregional differences in factor endowments," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 423-451, November.
    3. Ben Ferrett & Ian Wooton, 2010. "Competing for a duopoly: international trade and tax competition," Canadian Journal of Economics, Canadian Economics Association, vol. 43(3), pages 776-794, August.
    4. Fumagalli, Chiara, 2003. "On the welfare effects of competition for foreign direct investments," European Economic Review, Elsevier, vol. 47(6), pages 963-983, December.
    5. Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, September.
    6. Ottaviano, Gianmarco I.P. & van Ypersele, Tanguy, 2005. "Market size and tax competition," Journal of International Economics, Elsevier, vol. 67(1), pages 25-46, September.
    7. Ben Ferrett & Ian Wooton, 2010. "Tax competition and the international distribution of firm ownership: an invariance result," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 17(5), pages 518-531, October.
    8. Robert E. Lipsey & Magnus Blomstrom & Eric D. Ramstetter, 1998. "Internationalized Production in World Output," NBER Chapters, in: Geography and Ownership as Bases for Economic Accounting, pages 83-138, National Bureau of Economic Research, Inc.
    9. Bjorvatn, Kjetil & Eckel, Carsten, 2006. "Policy competition for foreign direct investment between asymmetric countries," European Economic Review, Elsevier, vol. 50(7), pages 1891-1907, October.
    10. Haufler, Andreas & Wooton, Ian, 1999. "Country size and tax competition for foreign direct investment," Journal of Public Economics, Elsevier, vol. 71(1), pages 121-139, January.
    11. Olsen, Trond E. & Osmundsen, Petter, 2003. "Spillovers and international competition for investments," Journal of International Economics, Elsevier, vol. 59(1), pages 211-238, January.
    12. Markusen, James R. & Morey, Edward R. & Olewiler, Nancy, 1995. "Competition in regional environmental policies when plant locations are endogenous," Journal of Public Economics, Elsevier, vol. 56(1), pages 55-77, January.
    13. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association;National Tax Journal, vol. 52(2), pages 269-304, June.
    14. Haaparanta, Pertti, 1996. "Competition for foreign direct investments," Journal of Public Economics, Elsevier, vol. 63(1), pages 141-153, December.
    15. Baldwin, Richard E. & Krugman, Paul, 2004. "Agglomeration, integration and tax harmonisation," European Economic Review, Elsevier, vol. 48(1), pages 1-23, February.
    16. George R. Zodrow & Peter Mieszkowski, 2019. "Pigou, Tiebout, Property Taxation, and the Underprovision of Local Public Goods," World Scientific Book Chapters, in: George R Zodrow (ed.), TAXATION IN THEORY AND PRACTICE Selected Essays of George R. Zodrow, chapter 17, pages 525-542, World Scientific Publishing Co. Pte. Ltd..
    17. Robert E. Baldwin & Robert E. Lipsey & J. David Richardson, 1998. "Geography and Ownership as Bases for Economic Accounting," NBER Books, National Bureau of Economic Research, Inc, number bald98-1.
    18. Ian King & R. Preston McAfee & Linda Welling, 1993. "Industrial Blackmail: Dynamic Tax Competition and Public Investment," Canadian Journal of Economics, Canadian Economics Association, vol. 26(3), pages 590-608, August.
    19. Thomas A. Gresik, 2001. "The Taxing Task of Taxing Transnationals," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 800-838, September.
    20. 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 877-892, September.
    21. Brander, James A. & Spencer, Barbara J., 1985. "Export subsidies and international market share rivalry," Journal of International Economics, Elsevier, vol. 18(1-2), pages 83-100, February.
    22. Black, Dan A & Hoyt, William H, 1989. "Bidding for Firms," American Economic Review, American Economic Association, vol. 79(5), pages 1249-1256, December.
    23. Flavio M. Menezes, 2003. "An auction theoretical approach to fiscal wars," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 20(1), pages 155-166.
    24. Davies, Stephen & Lyons, Bruce, 1996. "Industrial Organization in the European Union: Structure, Strategy, and the Competitive Mechanism," OUP Catalogue, Oxford University Press, number 9780198289739.
    25. Janeba, Eckhard, 1998. "Tax competition in imperfectly competitive markets," Journal of International Economics, Elsevier, vol. 44(1), pages 135-153, February.
    26. Kozul-Wright, Richard & Rowthorn, Robert, 1998. "Spoilt for Choice? Multinational Corporations and the Geography of International Production," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 14(2), pages 74-92, Summer.
    27. Michael P. Devereux & Rachel Griffith & Alexander Klemm, 2002. "Corporate income tax reforms and international tax competition [‘Do domestic firms benefit from direct foreign investment? Evidence from Venezuela’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 17(35), pages 449-495.
    28. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ronald B. Davies & Hartmut Egger & Peter Egger, 2003. "Tax Competition for International Producers and the Mode of Foreign Market Entry," University of Oregon Economics Department Working Papers 2006-19, University of Oregon Economics Department, revised 10 Jun 2003.
    2. Haufler, Andreas & Wooton, Ian, 2007. "Competition for Firms in an Oligopolistic Industry: Do Firms or Countries Have to Pay?," Discussion Papers in Economics 1399, University of Munich, Department of Economics.
    3. Taiji Furusawa & Kazumi Hori & Ian Wooton, 2015. "A race beyond the bottom: the nature of bidding for a firm," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(3), pages 452-475, June.
    4. Haufler, Andreas & Wooton, Ian, 2010. "Competition for firms in an oligopolistic industry: The impact of economic integration," Journal of International Economics, Elsevier, vol. 80(2), pages 239-248, March.
    5. Ben Ferrett & Andreas Hoefele & Ian Wooton, 2019. "Does tax competition make mobile firms more footloose?," Canadian Journal of Economics, Canadian Economics Association, vol. 52(1), pages 379-402, February.
    6. Wilson, John Douglas & Wildasin, David E., 2004. "Capital tax competition: bane or boon," Journal of Public Economics, Elsevier, vol. 88(6), pages 1065-1091, June.
    7. Haufler, Andreas & Wooton, Ian, 2006. "The effects of regional tax and subsidy coordination on foreign direct investment," European Economic Review, Elsevier, vol. 50(2), pages 285-305, February.
    8. O. Amerighi & G. De Feo, 2007. "Competition for FDI in the Presence of a Public Firm and the Effects of Privatization," Working Papers 605, Dipartimento Scienze Economiche, Universita' di Bologna.
    9. Sato, Yasuhiro & Thisse, Jacques-Francois, 2007. "Competing for capital when labor is heterogeneous," European Economic Review, Elsevier, vol. 51(8), pages 2054-2079, November.
    10. Ronald B. Davies & Carsten Eckel, 2010. "Tax Competition for Heterogeneous Firms with Endogenous Entry," American Economic Journal: Economic Policy, American Economic Association, vol. 2(1), pages 77-102, February.
    11. Jie Ma, 2013. "Market Size, Local Sourcing and Policy Competition for Foreign Direct Investment," Review of International Economics, Wiley Blackwell, vol. 21(5), pages 984-995, November.
    12. Hannes Winner, 2005. "Has Tax Competition Emerged in OECD Countries? Evidence from Panel Data," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 12(5), pages 667-687, September.
    13. Rainald Borck & Hyun‐Ju Koh & Michael Pflüger, 2012. "Inefficient Lock‐In And Subsidy Competition," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(4), pages 1179-1204, November.
    14. Zodrow, George R, 2003. "Tax Competition and Tax Coordination in the European Union," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 10(6), pages 651-671, November.
    15. Andreas Haufler & Michael Pflüger, 2004. "International Commodity Taxation under Monopolistic Competition," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 6(3), pages 445-470, August.
    16. Amrita Dhillon & Myrna Wooders & Ben Zissimos, 2007. "Tax Competition Reconsidered," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(3), pages 391-423, June.
    17. Hikaru Ogawa & Yasuhiro Sato & Toshiki Tamai, 2016. "Who gains from capital market integration? Tax competition between unionized and non-unionized countries," Canadian Journal of Economics, Canadian Economics Association, vol. 49(1), pages 76-110, February.
    18. O. Amerighi & S. Peralta, 2007. "Exports Versus Horizontal Foreign Direct Investment with Profit Shifting," Working Papers 604, Dipartimento Scienze Economiche, Universita' di Bologna.
    19. Michael Keen & Kai A. Konrad, 2012. "International Tax Competition and Coordination," Working Papers international_tax_competi, Max Planck Institute for Tax Law and Public Finance.
    20. Davies, Ronald B. & Ellis, Christopher J., 2007. "Competition in taxes and performance requirements for foreign direct investment," European Economic Review, Elsevier, vol. 51(6), pages 1423-1442, August.

    More about this item

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cje:issued:v:43:y:2010:i:3:p:776-794. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Prof. Werner Antweiler (email available below). General contact details of provider: https://edirc.repec.org/data/ceaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.