The Economics Seminar Series presents Xiao Wang on Friday, Oct. 16, from 10 to 11 a.m.
Xiao is Professor at the University of Science and Technology of China.
For more information about the Economics Seminars, contact Dr. Roberto Duncan.
Abstract: Using a two-country model with heterogeneous firms, we show that the optimal level and welfare gains of foreign direct investment (FDI) subsidies critically depend on how they are funded. In a setting that resembles common tax distortions in emerging markets, we compare the effects of distortionary taxes that are imposed to fund FDI subsidies and examine their cross-country spillovers. Our model predicts that the optimal level of FDI subsidies and the associated welfare gains are much lower than those for non-distortionary taxes. FDI subsidies funded by distortionary taxes are also found to be beggar-thy-neighbor, although they generate positive cross-country welfare spillovers if funded by non-distortionary labor income taxes.
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