The Silver Lining of Red Tape

An increasing number of international agreements require “nondiscrimination” from their participants, i.e. the government of one country cannot treat foreign firms differently from domestic firms. This is at odds with a government’s desire to benefit its own citizens rather than foreign citizens. I show that the use of red tape – a wasteful application process – can achieve de-facto discrimination. Key to this result is firm heterogeneity since, although the red tape cost is constant across firms, only those sufficiently benefiting from an incentive program will find it worth the cost of applying. If the benefits of targeting subsidies outweigh the burden of red tape on domestic firms, red tape will be used.Red Tape; Firm Heterogeneity; Production Subsidies; Discrimination

Asymmetric FDI and Tax-Treaty Bargaining: Theory and Evidence

Tax treaties are often viewed as a mechanism for eliminating tax competition, however this approach ignores the need for bargaining over the treaty?s terms. This paper focuses on how bargaining can affect the withholding taxes set under the treaty. In a simple framework, we develop hypotheses about patterns in treaty tax rates. A key determinant for these patterns is the relative size of bilateral foreign direct investment (FDI) activity. In plausible situations, more asymmetric countries will negotiate treaties with higher tax rates. This theory is then tested using 1992 data from U.S. bilateral tax treaties. Overall, the data supports the prediction that greater asymmetric FDI activity increases the negotiated tax rates.Foreign Direct Investment, Tax Treaties, Multinational Corporations, Bargaining, Withholding Taxes.

The Effect of FDI on Child Labor

This paper examines the extent to which foreign direct investment (FDI) affects child labor. Using 1995 data for 145 countries, we find that, contrary to common fears, FDI is negatively correlated with child labor. This effect, however, disappears when controlling for per capita income. After doing so, we find no robust effect of either FDI or international trade on child labor. This result is robust to corrections for the endogeneity of FDI, trade, and income. Furthermore, this result is confirmed when using data from earlier years and when using fixed effects. This suggests that the impact of FDI and trade on child labor, if any, is the increases in income they generate.Child Labor, Foreign Direct Investment, International Trade

How Far Away is an Intangible? Services FDI and Distance

Foreign direct investment (FDI) in services has grown significantly in recent years. Evidence of spatial relationships in FDI decisions have been provided for goods manufacturing by utilizing physical distance-based measures of trade costs. This paper investigates spatial interactions for services FDI using several distance measures, including physical distance, genetic distance, and transport time. Across different measures of distance, the traditional determinants of outbound FDI activity remain valid for services. We also find spatial interdependence for services FDI that is generally supportiveof complex vertical motivations.Foreign direct investment, Services, Spatial econometric techniques

Tax Competition for Heterogeneous Firms with Endogenous Entry: The Case of Heterogeneous Fixed Costs

This paper models tax competition for mobile firms that are differentiated by the amount of labor needed to cover fixed costs. Because tax competition affects the distribution of firms, it affects both relative equilibrium wages across countries and equilibrium prices. These in turn influence the equilibrium number of firms. From the social planner's perspective, optimal tax rates are harmonized, providing the optimal number of firms, and set such that income is efficiently distributed between private and public consumption. As is common in tax competition models, in the Nash equilibrium tax rates are inefficiently low, yielding underprovision of public goods. Furthermore, there exist a variety of situations in which equilibrium tax rates differ. As a result, too many firms enter the market as governments compete to be the low-tax, high-wage country. This illustrates a new distortion from tax competition and provides an additional benefit from tax harmonization.Tax Competition, Foreign Direct Investment, Tax Harmonization

How Far Away is an Intangible? Services FDI and Distance

Foreign direct investment (FDI) in services has grown significantly in recent years. Evidence of spatial relationships in FDI decisions have been provided for goods man- ufacturing by utilizing physical distance-based measures of trade costs. This paper investigates spatial interactions for services FDI using several distance measures, in- cluding physical distance, genetic distance, and transport time. Across different mea- sures of distance, the traditional determinants of outbound FDI activity remain valid for services. We also find spatial interdependence for services FDI that is generally supportive of complex vertical motivations.Foreign direct investment, Services, Spatial econometric techniques

Tax Competition for Heterogeneous Firms with Endogenous Entry:The Case of Heterogeneous Fixed Costs

This paper models tax competition for mobile firms that are differentiated by the amount of labor needed to cover fixed costs. Because tax competition affects the distribution of firms, it affects both relative equilibrium wages across countries and equilibrium prices. These in turn influence the equilibrium number of firms. From the social planner's perspective, optimal tax rates are harmonized, providing the optimal number of firms, and set such that income is efficiently distributed between private and public consumption. As is common in tax competition models, in the Nash equilibrium tax rates are inefficiently low, yielding underprovision of public goods. Furthermore, there exist a variety of situations in which equilibrium tax rates differ. As a result, too many firms enter the market as governments compete to be the low-tax, high-wage country. This illustrates a new distortion from tax competition and provides an additional benefit from tax harmonization.Tax Competition, Foreign Direct Investment, Tax Harmonization

How Far Away is an Intangible? Services FDI and Distance

Foreign direct investment (FDI) in services has grown significantly in recent years. Evidence of spatial relationships in FDI decisions have been provided for goods manufacturing by utilizing physical distance-based measures of trade costs. This paper investigates spatial interactions for services FDI using several distance measures, including physical distance, genetic distance, and transport time. Across different measures of distance, the traditional determinants of outbound FDI activity remain valid for services. We also find spatial interdependence for services FDI that is generally supportive of complex vertical motivations.foreign direct investment, services, spatial econometric techniques

Tax Competition in an Expanding European Union

This paper empirically examines whether expansion of the EU has increased international tax competition. To do so, we use a market potential weighting scheme to estimate the slope of best responses. We find robust evidence for tax competition. In particular, our estimates suggest that EU membership affects responses with EU members responding more to the tax rates of other members. This lends credence to the above noted concerns.Tax Competition; Foreign Direct Investment; Spatial Econometrics

Of Donor Coordination, Free-Riding, Darlings, and Orphans: The dependence of bilateral aid commitments on other bilateral giving

Using data from 1988 to 2007, we examine to what extent bilateral aid flows of an individual donor to a country depend on aid flows from all other bilateral and multilateral donors to that country. We thereby want to assess to what extent donor coordination, free-riding, selectivity, and common donor motivations drive bilateral aid allocation as these determinants would point to different dependence structures. Using approaches from spatial econometrics and controlling for endogeneity using an GMM framework, we find that other bilateral flows lead to a significant (but rather small) increase in aid flows from a particular donor. The effects are particularly pronounced for so-called donor 'orphans' who seem to be collectively shunned by bilateral aid donors. This suggests that donor coordination and free-riding are quantitatively less important than common donor interests and selectivity. --