FDI, trade costs and regional asymmetries

Julia Darby, Ben Ferrett, Ian Wooton

Research output: Contribution to conferencePaper

Abstract

We set up a trade model where three countries compete for an exogenous number of firms. Our innovation lies in the geography of the model. Of the three countries, one is the hub through which all trade takes place. First, we establish the natural geography of the region, which is given by the equilibrium distribution of industrial activity in the absence of taxes or subsidies. We then examine the implications for corporate taxes when the countries compete with each other to attract firms. We find that, even when all countries are the same size, the centrality of the hub gives it an advantage in tax setting, such that its equilibrium tax can be larger than that of the spokes and yet it still attracts a disproportionate share of industry. Thus geographic advantage in tax competition has a second dimension, centrality in addition to size.
Original languageEnglish
Number of pages24
Publication statusPublished - 17 May 2013
EventCESifo Area Conference on the Global Economy 2013 - Munich, Germany
Duration: 17 May 201318 May 2013

Conference

ConferenceCESifo Area Conference on the Global Economy 2013
CountryGermany
CityMunich
Period17/05/1318/05/13

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Keywords

  • corporate taxes
  • trade costs
  • devolution

Cite this

Darby, J., Ferrett, B., & Wooton, I. (2013). FDI, trade costs and regional asymmetries. Paper presented at CESifo Area Conference on the Global Economy 2013, Munich, Germany.