Working Paper

Political Economy

Marius Brülhart, Kurt Schmidheiny

2011/36: Estimating the rivalness of state-level inward FDI

Decentralized fiscal decision making is more likely to be optimal if regional tax bases are non-rival, in the sense that one region’s gain is no other relevant region’s loss. We develop a method for estimating the rivalness of tax bases using the underlying structures of the conditional logit, Poisson and nested logit models. We use this method to estimate the effect of state-level capital taxation on U.S. inward foreign direct investment. While the results are rather noisy, the assumption of perfect non-rivalenss can in some cases be rejected, but the assumption of perfect rivalness cannot. Competition over FDI across U.S. states may well be a zero-sum game.