Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/189188 
Year of Publication: 
1992
Series/Report no.: 
Queen's Economics Department Working Paper No. 864
Publisher: 
Queen's University, Department of Economics, Kingston (Ontario)
Abstract: 
This paper provides a new explanation for "tax holidays," as well as their subsequent removal in a tax reform stage. In a two-period model, I assume that perfectly competitive foreign investors are uncertain about the host country government's propensity for public spending, and that infinitely divisible capital is subject to strictly convex adjustment costs. The host country government's current period tradeoff between public spending and the associated deadweight loss from distortionary taxation may signal the host's type and spare the investors from an unanticipated future tax hike. A separating equilibrium requires a deep tax concession early on, which corresponds to a tax holiday. When there are overlapping generations of foreign investors the tax profile flattens out over time as the information from tax holidays is exhausted; this is the tax reform phase.
Subjects: 
foreign investment
signalling
tax holiday
time inconsistency
JEL: 
O26
321
441
Document Type: 
Working Paper

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