International presentation
Jun 13, 2019

Economic integration and agglomeration of multinational production with transfer pricing

Munich Young Economics' Meeting 2019
  • Hirofumi Okoshi

Event date
Jun 12, 2019 - Jun 14, 2019
Presentation type
Oral presentation (general)
University of Munich, GRK1928 Cohort 2016-2017
Kochek am See, Barvaria

Do low corporate taxes always favor multinational production in the course of economic integration? We build a two-country spatial model with different corporate tax rates in which multinational enterprises (MNEs) can manipulate transfer prices in intra-firm trade. Using transfer pricing, MNEs can shift profits between domestic production plants and foreign distribution affliates. In the beginning of integration, MNEs' plants are concentrated in the low-tax country, and in the later stage, this location pattern reverses. High taxes may favor multinational production; but it does not guarantee greater tax revenues. We also analyze tax competition between two unequal-sized countries and show that profit shifting leads to tougher competition.