Competing for a Duopoly: International Trade and Tax Competition

Preliminary Version, August 2005 Competing for a Duopoly: International Trade and Tax Competition Abstract We consider the competition between potential host governments to attract the investment of both firms in an industry. Competition by identical countries for a monopoly firm’s investment is known to result in a “race to the bottom” where all rents are captured by the firm through subsidies. We demonstrate that with two firms, both are taxed in equilibrium, despite the explicit non-cooperation between governments. When countries differ in size, a single firm will be attracted to the larger market. We explore the conditions under which both firms in a duopoly co-locate and when each nation attracts a firm in equilibrium. The literature tends to focus on the polar cases of (perfect) competition and monopoly, despite the empirical prevalence of oligopoly. Our investigation of duopoly is a first step to a more complete understanding. Ben Ferrett GEP, University of Nottingham Ian Wooton University of Strathclyde and CEPR

Competing for a Duopoly: International Trade and Tax Competition

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