A simple model of corporate bailouts in a globalized economy

This paper explores how globalization influences the decision of governments to rescue inefficient domestic firms when bailouts affect firms'markups. We develop a model of international trade where immobile domestic enterprises (DOEs) compete with foreign enterprises (FOEs) in an oligopolistic market. The decision to bail out DOEs leads to lower corporate tax revenues if FOEs are immobile whereas tax revenues might increase if FOEs are mobile. Interestingly, the mobility of FOEs makes governments more prone to rescue inefficient domestic firm s because tax competition reduces the opportunity cost of a bailout policy in terms of public good provision.