TY - JOUR
T1 - The impact of state corporate taxes on FDI location
AU - Agostini, Claudio A.
PY - 2007/5
Y1 - 2007/5
N2 - This article examines the effects of state corporate income taxes on the location of foreign direct investment in the United States, taking into account the endogeneity of taxes and the outside options of investors. States have a set of characteristics that influence investors' decisions; some of them are not observable by a researcher, but states may take them into account when they set taxes. States also can act strategically with respect to other states when setting taxes. Both behaviors bias the estimated tax effects because they create correlation between the error term and the tax rate. I adapt a discrete-choice model of differentiated products to estimate the tax effects. This approach allows me both to control for the outside options of investors and to use instrumental variables to solve the problem of tax endogeneity. I find the tax elasticity to be consistently about 1.
AB - This article examines the effects of state corporate income taxes on the location of foreign direct investment in the United States, taking into account the endogeneity of taxes and the outside options of investors. States have a set of characteristics that influence investors' decisions; some of them are not observable by a researcher, but states may take them into account when they set taxes. States also can act strategically with respect to other states when setting taxes. Both behaviors bias the estimated tax effects because they create correlation between the error term and the tax rate. I adapt a discrete-choice model of differentiated products to estimate the tax effects. This approach allows me both to control for the outside options of investors and to use instrumental variables to solve the problem of tax endogeneity. I find the tax elasticity to be consistently about 1.
KW - Foreign direct investment
KW - State corporate income taxes
KW - Tax endogeneity
UR - http://www.scopus.com/inward/record.url?scp=34247279737&partnerID=8YFLogxK
U2 - 10.1177/1091142106292491
DO - 10.1177/1091142106292491
M3 - Article
AN - SCOPUS:34247279737
SN - 1091-1421
VL - 35
SP - 335
EP - 360
JO - Public Finance Review
JF - Public Finance Review
IS - 3
ER -