Endogenous Timing in Tax and Public-Investment Competition

This study analyzes an endogenous order of moves in an interregional competition for mobile capital, where countries choose their tax or subsidy rate and public-investment levels. In equilibrium, countries set tax or subsidy rates simultaneously, but choose their public-investment levels sequentially. In addition, on comparing the welfare between the simultaneous-move and sequential-move outcomes, we find that (i) the sequential-move welfare levels are always larger, and (ii) the regional disparity in the sequential-move outcome is larger (smaller) than that in the simultaneous-move outcome if the capital-exporting (-importing) country leads in public investment. (JEL: H73, H77)