Heterogeneous Firms, ‘Profit Shifting’ FDI and International Tax Competition (with Sebastian Krautheim)
Forthcoming in Journal of Public Economics
Latest version (September 2010): download
Abstract: Larger firms are more likely to use tax haven operations to exploit international tax differences. We study tax competition between a large country and a tax haven. In the large country, heterogeneous firms operate under monopolistic competition and can choose to shift profits abroad. We show that a higher degree of firm heterogeneity (a mean-preserving spread of the cost distribution) increases the degree of tax competition, i.e. it decreases the equilibrium tax rate of the large country, leads to higher outflows of its tax base and thus decreases its equilibrium tax revenues. Similar effects hold for a higher substitutability across varieties.
Bank Bailouts, International Linkages and Cooperation (with Friederike Niepmann)
Latest version (October 2010, CBT Working Paper 10/16): download
Abstract: Financial institutions are increasingly linked internationally. As a result, financial crisis and government intervention have stronger effects beyond borders. We provide a model of international contagion allowing for bank bailouts. While a social planner trades off tax distortions, liquidation losses and intra- and inter-country income inequality, in the non-cooperative game between governments there are inefficiencies due to externalities, no burden sharing and free-riding. We show that, in absence of cooperation, stronger interbank linkages make government interests diverge, whereas cross-border asset holdings tend to align them. We analyze different forms of cooperation and their effects on global and national welfare.
Towards a Theory of Trade Finance
(Best Paper Award, Xth RIEF Doctoral Meeting, Kiel 2010)
EUI Working Paper 2009/43 (December 2009): download
Abstract: Cross border transactions are conducted using different payment contracts, the usage of which varies across countries and over time. In this paper I build a model that can explain this observation and study implications from this for international trade. In the model exporters optimally choose payment contracts, trading off differences in enforcement and efficiency between financial markets in different countries. I find that the ability of firms to switch contracts is central to the reaction of trade to variations in financial conditions. Numerical experiments with a two-country version of the model suggest that limiting the choice between payment contracts reduces traded quantities by up to 60 percent.