Together or Apart? Eco-Friendly Location Under Fiscal Competition

37 Pages Posted: 1 Apr 2024

Abstract

Pollution is an intraregional transboundary issue that influences governments’ policies for attracting a multinational enterprises (MNE) with superior production and clean technologies. This paper analyzes fiscal competition between two asymmetric-sized countries under production-based pollution. An indigenous local firm exists in a large country, and two countries design a lump-sum fiscal policy for an MNE outside the region. We find that fiscal competition under transboundary pollution changes the equilibrium location of an MNE from the large country to the small country when inter-regional trade costs are sufficiently small. The small country successfully attracts the MNE with a tax because the counteroffer by the large government has a heavier tax. Moreover, fiscal competition makes the large country more attractive for the MNE when the degree of transboundariness is large and the MNE has cleaner technology.

Keywords: Fiscal competition, Transboundary pollution, Foreign direct investment

Suggested Citation

Higashida, Keisaku and Okoshi, Hirofumi, Together or Apart? Eco-Friendly Location Under Fiscal Competition. Available at SSRN: https://ssrn.com/abstract=4780386 or http://dx.doi.org/10.2139/ssrn.4780386

Keisaku Higashida (Contact Author)

Kwansei Gakuin University ( email )

Hirofumi Okoshi

Okayama University ( email )

1-1-1 Tsushimanaka, Kita Ward
Okayama, 700-0082
Japan
+81 86 251 7525 (Phone)

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