Governments at the bidding table

The New Zealand government has recently indicated it will scale back its subsidy program for foreign firms investing in the country, except for screen productions, and divert the budgeted funds to an outward investment strategy. In sharp contrast, local governments have lately shown a much greater willingness to subsidize cultural or sporting events in order to boost local economic activity. I evaluate under what circumstances it makes sense for a government to subsidize private investments, paying particular attention to interjurisdictional competition. I show what factors determine equilibrium subsidy levels when governments enter a bidding war, and derive the expected welfare gain.FDI, externalities, interjurisdictional competition, subsidy,