Abstract

This paper examines the microeconomic motivation of governments to provide tax incentives for foreign direct investment. Author applies the classical models of oligopoly to subsidy competition, endogenousing investment incentives, but leaving tax rates exogenous. According to the conventional wisdom, subsidy competition leads to overprovision of incentives. This paper suggests that, in the oligopolistic framework, supranational coordination can either decrease or increase the supply of subsidies. Further, in the setting of subsidy regulation, the host country’s corporate income tax rate has an ambiguous effect on the provision of incentives.

A game tree in which two countries choose between cooperation and noncooperation and between generic and ad hoc incentives, with the investment going to the country whose incentive exceeds its minimal sufficient level
Fig: The general model of the supply of investment incentives

Reference: Tomas Havranek (2009), "The Supply of Foreign Direct Investment Incentives: Subsidy Competition in an Oligopolistic Framework." Prague Economic Papers 18(2): 131-155.

Read the paper

How to cite

Tomas Havranek (2009), "The Supply of Foreign Direct Investment Incentives: Subsidy Competition in an Oligopolistic Framework." Prague Economic Papers 18(2): 131-155.

BibTeX 
@article{havranek2009subsidy,
  author  = {Tomas Havranek},
  title   = {The Supply of Foreign Direct Investment Incentives: Subsidy Competition in an Oligopolistic Framework},
  journal = {Prague Economic Papers},
  volume  = {18},
  number  = {2},
  pages   = {131--155},
  year    = {2009},
  doi     = {10.18267/j.pep.346},
}