DP10099 Regional Centrality and Tax Competition for FDI

Author(s): Julia Darby, Ben Ferrett, Ian Wooton
Publication Date: August 2014
Keyword(s): corporate taxes, devolution, hub and spoke, trade costs
JEL(s): F15, F23, H25, H73
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10099

We examine a trade model where three countries compete for an exogenous number of firms. In our hub-and-spoke framework, one country is the hub through which all trade with and between spokes takes place. We establish the distribution of industrial activity in the absence of taxes and compare it to the equilibrium when countries compete to attract firms. Even when all countries are the same size, the centrality of the hub sets it apart. We determine how this trading pattern matters, comparing it to a structure with direct trade between all countries. The implications of international tax competition are also examined.