Scandinavian Working Papers in Business Administration

Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science

No 2010/13: Multinationals, tax competition and outside options

Trond E. Olsen () and Petter Osmundsen ()
Additional contact information
Trond E. Olsen: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway
Petter Osmundsen: Dept. of Industrial Economics, Risk Management and Planning, University of Stavanger, Postal: The University of Stavanger , Department of Industrial Economics, Risk Management and Planning, 4036 Stavanger, Norway

Abstract: We analyse tax competition when a multinational firm has invested in two countries but also has an outside option, e.g., towards a third country. An interesting finding is that more attractive outside options for firms may constitute a win-win situation; the firm as well as its present host countries may gain when this occurs. The reason that it benefits the host countries is that an enhanced outside option reduces the inefficiencies of tax competition. An implication of the result is that better outside options for multinational firms may reduce the gains from host countries’ policy coordination and thus reduce those countries’incentives to coordinate their policies. Also, with a development where outside options become more accessible, the perceived costs of tax competition, e.g., in terms of underprovision of public goods, may be overestimated. Our findings may also have implications for international negotiations, since it provides an argument for mutual reduction of entry barriers, as this may improve outside options.

Keywords: Tax competition; mobility; common agency; countervailing incentives

JEL-codes: D82; H21; L51

27 pages, September 30, 2010

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