Optimal National policies towards multinationals when local regions can choose between firm-specific and non-firm-specific policies

Abstract: This paper looks at a country's optimal central-government optimal policy in a setting where its two identical local jurisdictions compete to attract footloose multinationals to their sites, and where the considered multinationals strictly prefer this country to the rest of the world. For the sake of realism the model allows the local jurisdictions to choose between firm-specific and non-firm-specific policies. We show that the implementation of the jurisdictional firm-specific policy is weakly welfare dominant. Hence the frequent calls for the central government to ban the former type of policies go against the advice of this paper.