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Competition for Foreign Capital under Asymmetric Revenue-Orientation

Pal, Rupayan and Sharma, Ajay (2016): Competition for Foreign Capital under Asymmetric Revenue-Orientation. Published in: Indian Economic Review , Vol. 1/2, No. 51 (December 2016): pp. 105-116.

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This paper develops a model of inter-regional competition for mobile capital considering that regions may have different revenue-orientations. It shows that, if regions are asymmetric in terms of revenue-orientation, the less revenue-orientated region obtains higher tax-revenue and higher social welfare in the equilibrium than the more revenue-oriented region. However, if regions are symmetric, the equilibrium tax-revenue and social welfare are higher in the case of greater revenue-orientation of regions. Moreover, regions spend on public-investment and end up with Pareto-inferior equilibrium outcome, regardless of whether regions are symmetric or asymmetric. It also analyses implications of public-investment spill-over on equilibrium outcomes.

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