Fiscal Competition in Developing Countries: A Survey of the Theoretical and Empirical Literature

35 Pages Posted: 20 Apr 2016

See all articles by Thierry Madies

Thierry Madies

Université d'Évry - Centre D'Etudes des Politiques Economiques et de L'Emploi (EPEE); Université Paris I Panthéon-Sorbonne - Laboratoire d'Economie Publique (LAEP)

Jean-Jacques Dethier

World Bank

Date Written: May 1, 2010

Abstract

The last two decades have witnessed a sharp increase in foreign direct investment (FDI) flows and increased competition among developing countries to attract FDI, resulting in higher investment incentives offered by host governments and removal of restrictions on operations of foreign firms in their countries. Fiscal competition between governments can take the form of business tax rebates, productivity-enhancing public infrastructure or investment incentives such as tax holidays, accelerated depreciation allowances or loss carry-forward for income tax purposes. It can take place between governments of different countries or between local governments within the same country. This paper surveys the recent theoretical and empirical economic literature on decentralization which attempts to answer three questions. First, does theoretical literature on fiscal competition and "bidding races" contribute to a better understanding of such phenomenon in developing countries? Second, are FDI inflows in developing countries sensitive to fiscal incentives and is there empirical evidence of strategic behavior from the part of developing countries in order to attract FDI? Third, what evidence is there about fiscal competition among local governments in developing countries?

Keywords: Subnational Economic Development, Debt Markets, Taxation & Subsidies, Emerging Markets, Public Sector Economics

Suggested Citation

Madies, Thierry and Dethier, Jean-Jacques, Fiscal Competition in Developing Countries: A Survey of the Theoretical and Empirical Literature (May 1, 2010). World Bank Policy Research Working Paper No. 5311. Available at SSRN: https://ssrn.com/abstract=1610008

Thierry Madies

Université d'Évry - Centre D'Etudes des Politiques Economiques et de L'Emploi (EPEE)

Boulevard Francois Mitterrand
F-91025 Evry Cedex
France

Université Paris I Panthéon-Sorbonne - Laboratoire d'Economie Publique (LAEP)

106 -112 boulevard de l'Hopital
Paris Cedex 13, 75 647
France

Jean-Jacques Dethier (Contact Author)

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

HOME PAGE: http://econ.worldbank.org/staff/jdethier

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