Does competition for multiple investors mitigate the hold-up problem?
Kaushal KishoreIISER Bhopal
Two symmetric countries compete over two-period under a non-preferential (preferential) taxation regime to attract multiple investors where investors are strategic and investments are sunk once invested. We compare tax revenues of competing countries when one investor enters the market with a scenario where two investors enter the market during the initial period keeping the amount of capital fixed. We show that the combined tax revenue of competing countries is higher when two investors enter the market during the initial period, that is, the presence of multiple investors mitigates the hold-up problem. We also show that the equilibrium tax revenues under non-preferential regimes are strictly higher than that under preferential regimes.