A race beyond the bottom: the nature of bidding for a firm

We examine how the bidding environment may affect the outcome of tax competition between two countries (or two regions) in attracting a firm’s foreign direct investment (FDI). We compare the equilibrium location choice and payoffs from an English auction, with both complete and incomplete information, relative to those in the traditional setting of a sealed-bid first-price auction. We find that an English auction leads to more aggressive bidding in “race beyond the bottom,” where the nations may bid beyond their own valuations of the FDI. We also discuss the roles of auction protocol and information asymmetry on the auction outcome.