Quantitative Implications of the Home Bias: Foreign Underinvestment, Domestic Oversaving, and Corrective Taxation

26 Pages Posted: 13 Jul 2000 Last revised: 4 Apr 2008

See all articles by Assaf Razin

Assaf Razin

Tel Aviv University - Eitan Berglas School of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Efraim Sadka

Tel Aviv University - Eitan Berglas School of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Chi-Wa Yuen

The University of Hong Kong - School of Economics and Finance

Date Written: December 1997

Abstract

There is strong evidence about a home-court advantage in international portfolio" investment. One explanation for the bias is an information asymmetry between domestic and" foreign investors about the economic performance of domestic firms. This asymmetry causes" two types of distortions: an aggregate production inefficiency and a production-consumption" inefficiency, leading to foreign underinvestment and domestic oversaving respectively. Such" market failures are found to be quite severe, slightly more so with equity flows than with debt" flows. These inefficiencies can nonetheless be corrected by a mix of tax-subsidy instruments consisting of taxes on corporate income and on the capital incomes of both residents and" nonresidents. When only a partial set of instruments is available, however each tax instrument can change radically and may even be reversed although the welfare gains" can be fairly substantial and sometimes close to the first best optimum. This partial set of" instruments appears to be more effective in handling the market failure in the case of equity" flows than in the case of debt flows.

Suggested Citation

Razin, Assaf and Sadka, Efraim and Yuen, Chi-Wa, Quantitative Implications of the Home Bias: Foreign Underinvestment, Domestic Oversaving, and Corrective Taxation (December 1997). NBER Working Paper No. w6339. Available at SSRN: https://ssrn.com/abstract=226092

Assaf Razin (Contact Author)

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3 640 7303 (Phone)
+972 3 640 9908 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Efraim Sadka

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3 640 9712 (Phone)
+972 3 642 8074 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Chi-Wa Yuen

The University of Hong Kong - School of Economics and Finance ( email )

8th Floor Kennedy Town Centre
23 Belcher's Street
Kennedy Town
Hong Kong
+8 52 2859 1051 (Phone)
+8 52 7548 1152 (Fax)

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