TY - JOUR
T1 - ECONOMIC INTEGRATION AND AGGLOMERATION OF MULTINATIONAL PRODUCTION WITH TRANSFER PRICING
AU - Kato, Hayato
AU - Okoshi, Hirofumi
N1 - Funding Information:
We wish to thank coeditor, Masaki Aoyagi, and three anonymous referees for valuable comments and suggestions. This article is a much revised version of Chapter 2 of Okoshi's Ph.D. thesis submitted to the University of Munich (Okoshi, 2020 ). Helpful comments from the committee members, Carsten Eckel, Andreas Haufler, and Dominika Langenmayr are greatly appreciated. We are grateful to Cristina Angelico, Makoto Hasegawa, Tsung‐Yu Ho, Yukio Karasawa‐Ohtashiro, and Dirk Schindler for extensive discussions. Our thanks also go to participants of seminars and conferences at Kagawa University, Kochi University, University of Munich, IIPF (University of Tampere), 2019 Symposium of Public Economics (Osaka University), APTS (University of Tokyo), Osaka University (ISER and OSIPP), University of Tokyo, ERSA (University of Lyon), MYEM Conference (University of Munich), Chulalongkorn University, Kobe University, Hanyang University, NASMES2021 (UQAM) for comments. Financial supports from the Japan Society for the Promotion of Science (Grant Numbers: JP16J01228, JP17K03789, JP18H00866, JP19K13693; JP99K13693, JP20K22122), the German Research Foundation through GRK1928, the Nomura Foundation, and the Obayashi Foundation are gratefully acknowledged.
Publisher Copyright:
© 2022 The Authors. International Economic Review published by Wiley Periodicals LLC on behalf of the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association
PY - 2022
Y1 - 2022
N2 - Do low corporate taxes always favor multinational production over economic integration? We propose a two-country model in which multinationals choose the locations of production plants and foreign distribution affiliates and shift profits between them through transfer prices. With high trade costs, plants are concentrated in the low-tax country; surprisingly, this pattern reverses with low trade costs. Indeed, economic integration has a nonmonotonic impact: Falling trade costs first decrease and then increase the plant share in the high-tax country, which we empirically confirm. Moreover, allowing for transfer pricing makes tax competition tougher and international coordination on transfer-pricing regulation can be beneficial.
AB - Do low corporate taxes always favor multinational production over economic integration? We propose a two-country model in which multinationals choose the locations of production plants and foreign distribution affiliates and shift profits between them through transfer prices. With high trade costs, plants are concentrated in the low-tax country; surprisingly, this pattern reverses with low trade costs. Indeed, economic integration has a nonmonotonic impact: Falling trade costs first decrease and then increase the plant share in the high-tax country, which we empirically confirm. Moreover, allowing for transfer pricing makes tax competition tougher and international coordination on transfer-pricing regulation can be beneficial.
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U2 - 10.1111/iere.12569
DO - 10.1111/iere.12569
M3 - Article
AN - SCOPUS:85124602549
JO - International Economic Review
JF - International Economic Review
SN - 0020-6598
ER -