Competition for FDI with Vintage Investment and Agglomeration Advantages

WZB Markets and Politics Working Paper No. SP II 2008-09

26 Pages Posted: 26 Aug 2010

See all articles by Kai A. Konrad

Kai A. Konrad

Max Planck Institute for Tax Law and Public Finance; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute for Economic Research); IZA Institute of Labor Economics

Dan Kovenock

Chapman University - Economic Science Institute; CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: August, 25 2010

Abstract

Countries compete for new FDI investment, whereas stocks of FDI generate agglomeration benefits and are potentially subject to extortionary taxation. We study the interaction between these aspects in a simple vintage capital framework with discrete time and infinite horizon, focussing on Markov perfect equilibrium in stationary strategies. We show that the tax revenue in the equilibrium is substantial, and higher on "old" FDI than on "new" FDI, even though countries are not allowed to use discriminatory taxation. Moreover, the agglomeration advantage is valuable, but is exploited in the short run and can be unstable over time.

Keywords: dynamic tax competition, vintage capital, agglomeration, foreign direct investment, bidding for firms

JEL Classification: F21, H71

Suggested Citation

Konrad, Kai A. and Kovenock, Daniel, Competition for FDI with Vintage Investment and Agglomeration Advantages (August, 25 2010). WZB Markets and Politics Working Paper No. SP II 2008-09, Available at SSRN: https://ssrn.com/abstract=1664992 or http://dx.doi.org/10.2139/ssrn.1664992

Kai A. Konrad (Contact Author)

Max Planck Institute for Tax Law and Public Finance ( email )

Marstallplatz 1
Munich, 80539
Germany

HOME PAGE: http://www.tax.mpg.de/en/pub/home.cfm

Centre for Economic Policy Research (CEPR)

90-98 Goswell Road
London, EC1V 7RR
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, 81679
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, 53072
Germany

Daniel Kovenock

Chapman University - Economic Science Institute ( email )

One University Dr.
Orange, CA 92866
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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