Aug 30, 2019
Economic integration and agglomeration of multinational production with transfer pricing
ERSA 59th Congress
- Event date
- Aug 27, 2019 - Aug 30, 2019
- Language
- English
- Presentation type
- Oral presentation (general)
- Organizer
- European Regional Science Association, University of Lyon
- Venue
- University of Lyon
- Country/Region
- France
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.