Capital Mobility, Tax Competition, and the Provision of an International Public Goods

This paper studies how competition among the capital-importing countries (CIO's) to attract scarce foreign capital affects the provision of an internation-al public goods that has spillover effects to more than one country. We show that when the marginal cost to produce the public goods is different between the capital-exporting country (CEC) and the CIC's, the competition may have the CEC, where the cost to produce the public goods is higher than in the CIO's, provide the public goods We also show that even if the CEC can use a lump sum tax to provide the international public goods, the amount of the public goods may be below the optimal level in terms of world welfare Lastly, we briefly discuss the tax-crediting system as a possible solution to these two problems.