Unionisation triggers tax incentives to attract foreign direct investment

Haufler, Andreas and Mittermaier, Ferdinand (May 2008): Unionisation triggers tax incentives to attract foreign direct investment. Discussion Papers in Economics 2008-10

Abstract

This paper analyses tax competition between a unionised and a non-unionised country for the location of an outside firm. We show that unionisation offers an extra incentive for the government to attract a foreign competitor to a concentrated domestic market, in order to affect the behaviour of the domestic union. This results in the unionised country's government offering a tax discount (or a subsidy premium) to the outside firm in excess of what is needed to compensate the investor for the higher union wage. In equilibrium, therefore, the unionised country can attract the outside firm even if it has other location disadvantages, such as a smaller home market.

• Item Type: Paper (Discussion Paper)
• Keywords: tax competition, trade unions, foreign direct investment
• Subjects: Economics; Economics > Discussion Papers in Economics; Economics > Discussion Papers in Economics > Economic Policy; Economics > Discussion Papers in Economics > Public Finance
• Dewey Classification: 300 Social sciences; 300 Social sciences > 330 Economics
• Journal of Economic Literature classification: H25, H73, J58
• Language: English