A Simple Model of Corporate Bailouts in a Globalized Economy
GATE Working Paper Series 1913 - March 2019
36 Pages Posted: 16 Apr 2019
Date Written: March 2019
This paper explores how globalization influences the decision of governments to rescue inefficient domestic firms when bailouts affect firms' markups. We develop a model of international trade where immobile domestic enterprises (DOEs) compete with foreign enterprises (FOEs) in an oligopolistic market. The decision to bail out DOEs leads to lower corporate tax revenues if FOEs are immobile whereas tax revenues might increase if FOEs are mobile. Interestingly, the mobility of FOEs makes governments more prone to rescue ineffcient domestic firms because tax competition reduces the opportunity cost of a bailout policy in terms of public good provision.
Keywords: bailout of manufacturing firms, tax competition, trade costs, firm mobility
JEL Classification: F12, F15, D21, H25
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