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We set up a symmetric two-country model with two multinationals competing on the quantities and possibly manipulating their transfer prices. Governments choose both the corporate profit tax rate and the level of enforcement of the "arm's length" principle. We show that stronger enforcement increases equilibrium tax rates. We also and that a larger international ownership of multinationals leads to a "race to the top" in both policies between the two countries, while trade liberalization initially implies a "race to the bottom". But as trade becomes free enough, a further decrease in trade costs raises equilibrium tax rates and enforcement policies.

We set up a symmetric two-country model with two multinationals competing on the quantities and possibly manipulating their transfer prices. Governments choose both the corporate profit tax rate and the level of enforcement of the "arm's length" principle. We show that stronger enforcement increases equilibrium tax rates. We also and that a larger international ownership of multinationals leads to a "race to the top" in both policies between the two countries, while trade liberalization initially implies a "race to the bottom". But as trade becomes free enough, a further decrease in trade costs raises equilibrium tax rates and enforcement policies.

In this paper we set up a symmetric two-country model with trade costs and international ownership to study the transfer pricing decisions by two multinationals operating in markets with Cournot competition. We let governments choose both the corporate profit tax rate and the level of enforcement of the "arm's length" principle and we examine how enforcement policies affect the tax competition game. Furthermore, we analyze in what direction economic integration, in terms of a reduction in trade costs and/or a larger international ownership of multinationals, influences the symmetric equilibrium level of the two policy instruments. We show that increased economic integration may lead to higher equilibrium tax rates, and that, as governments increase the level of enforcement, equilibrium tax rates increase as well. Moreover, we find that, when the two MNEs are not fully owned by domestic residents, trade liberalization decreases the equilibrium enforcement policy, while increased international ownership increases the level of enforcement.

In this paper we set up a symmetric two-country model with trade costs and international ownership to study the transfer pricing decisions by two multinationals operating in markets with Cournot competition. We let governments choose both the corporate profit tax rate and the level of enforcement of the "arm's length" principle and we examine how enforcement policies affect the tax competition game. Furthermore, we analyze in what direction economic integration, in terms of a reduction in trade costs and/or a larger international ownership of multinationals, influences the symmetric equilibrium level of the two policy instruments. We show that increased economic integration may lead to higher equilibrium tax rates, and that, as governments increase the level of enforcement, equilibrium tax rates increase as well. Moreover, we find that, when the two MNEs are not fully owned by domestic residents, trade liberalization decreases the equilibrium enforcement policy, while increased international ownership increases the level of enforcement.

We study a firm which serves two unequally-sized markets and must choose where to locate its first production plant, and whether to open a second plant to serve the other market through local sales rather than exports. An exporter pays taxes only to the country where it locates its single production plant. A double- plant multinational pays taxes in both countries, but may shift taxable profits across countries, at a cost. We show that the usual proximity-concentration trade- off between fixed and trade costs is modified, depending on both the average tax of, and the tax difference between, the two countries. Moreover, in contrast to a standard result of the FDI literature, we find that increased market size asymmetry may make it more likely that the firm engages in horizontal FDI. From a global welfare viewpoint, it is always desirable to control the firm's profit shifting when the multinational structure is taken as given. However, the fact that the firm may react by changing its production structure may be a reason not to control profit shifting activities.

In this paper we investigate tax/subsidy competition for FDI between countries of different size when a domestic firm is the incumbent in the largest market. We investigate how the nature (public or private) of the incumbent firm affects policy competition between the two governments seeking to attract FDI. We show that the country hosting the incumbent always benefits from FDI if the domestic firm is a public welfare-maximizing firm, while its welfare may decrease when it is a private firm, as already shown by Bjorvatn and Eckel (2006). We also show that, contrary to the case of a private domestic incumbent, a public firm acts as a disciplinary device for the foreign multinational that will always choose the efficient welfare-maximizer location. Finally, an efficiency-enhancing role of policy competition may only arise when the domestic incumbent is a private firm, while tax competition is always wasteful when the incumbent is a public firm.

We investigate the impact on regional welfare of policy competition for FDI when a multinational firm can strategically react to differences in statutory corporate tax rates and shift taxable profits to lower-tax jurisdictions. We show that competing governments may have an incentive to tax discriminate between domestic and multinational firms even in the presence of profit shifting opportunities for the latter. In particular, tax competition leads to higher welfare for the region as a whole than lump-sum subsidy competition when the difference in statutory corporate tax rates and/or their average is high enough. We also find that policy competition increases regional welfare by changing the firm's investment decision when profit shifting motivations might induce the firm to locate in the least profitable country.

We investigate the impact on regional welfare of policy competition for FDI when a multinational firm can strategically react to differences in statutory corporate tax rates and shift taxable profits to lower-tax jurisdictions. We show that competing governments may have an incentive to tax discriminate between domestic and multinational firms even in the presence of profit shifting opportunities for the latter. In particular, tax competition leads to higher welfare for the region as a whole than lump-sum subsidy competition when the difference in statutory corporate tax rates and/or their average is high enough. We also find that policy competition increases regional welfare by changing the firm's investment decision when profit shifting motivations might induce the firm to locate in the least profitable country.

In this paper we investigate tax/subsidy competition for FDI between countries of different size when a welfare-maximizing and relatively inefficient public firm is the incumbent in the largest market. First, we analyze how the presence of a public firm affects the investment decision of a multinational operating in the same sector as the former and willing to serve both markets. When the public firm stops exporting to the small country due to the investment of the multinational in the region (or does not export altogether), policy competition between the two countries is irrelevant to the foreign firm's choice. But if the country receiving FDI has to pay a subsidy, only the multinational will be better off provided that it would have invested there anyway absent policy competition. By contrast, when the public firm exports to the small country, policy competition increases the attractiveness of the big country. Second, we show that privatizing the public firm makes the big country a relatively more attractive location for the investment. However, when the privatized firm stays in the market, welfare always decreases. After privatization, policy competition decreases the attractiveness of the big country, which may be willing to tax the multinational in order to discourage FDI from taking place there, and gives the small country the opportunity of benefiting from the investment.