To Invest or not to Invest: A real options approach to FDIs and tax competition |
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Authors: | Paolo M Panteghini Guttorm Schjelderup |
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Institution: | (1) University of Brescia and CESifo, Via San Faustino 74/b, 25122 Bresica, Italy;(2) Norwegian School of Economics and Business Administration and CESifo, Helleveien 30, 5045 Bergen, Norway |
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Abstract: | Foreign investment decisions of firms are often characterized by investment irreversibility, uncertainty, and the ability
to choose the optimal timing of foreign investments. We embed these characteristics into a real option theory framework to
analyze international competition among countries to attract mobile investments when firms, after the investment is sunk,
can shift profit to low tax countries by transfer pricing. We find that an increase in the uncertainty of profit income reduces
the equilibrium tax rates, whilst lower investment costs or larger profits, counteracts the negative fiscal externality of
tax competition leading to higher equilibrium tax rates.
JEL Code H25 |
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Keywords: | Corporate taxation Irreversibility MNE Real options Uncertainty |
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