Fiscal Federalism and Competitive Bidding for Foreign Investment as a Multistage Game
40 Pages Posted: 17 Jul 2014
Date Written: July 16, 2014
Abstract
This paper models the behavior of states in a federal country wishing to attract foreign firms to locate within their own individual jurisdictions. The essential intertemporal character of this decision is modeled as a multi-stage game to attract such foreign investment in these states. It is found that, when states with unequal political or economic infrastructure compete, the resulting Nash equilibrium profiles are inefficient. Under certain conditions, states that have won once, can “allow” a rival to win in a subsequent stage. The resulting Nash Equilibrium is more efficient. If the option of “allowing” a rival to win is not available, then states may resort to “suicide” strategies defined as outcomes created by history of losses.
Keywords: Fiscal federalism, multi-stage games, suicide strategies
JEL Classification: C70, H73, H77
Suggested Citation: Suggested Citation