Federal Tax Autonomy and the Limits of Cooperation
WZB-Markets and Political Economy Working Paper No. SPll 2005-18
23 Pages Posted: 8 Dec 2005
Date Written: October 2005
We consider the hold-up problem between a foreign direct investor and the government(s) in a host country with weak governmental structure and lack of power to commit. Using Nash threats, we show that an efficient investment level can be sustained for a sufficiently high discount factor and ask whether a federal structure makes collusion more or less sustainable. We show that collusion between the government and the investor is easier to sustain if the host country is more centralized or if the government layers can commit to fixed sharing rules.
Keywords: Tacit collusion, foreign direct investment, hold-up problem, federalism, vertical tax externality, tax competition
JEL Classification: H11, H71, H73, H77
Suggested Citation: Suggested Citation