Fiscal Federalism and Competitive Bidding for Foreign Investment as a Multistage Game

This paper models the behavior of states in a federal country wising to attract foreign firms to locate
within their own individual jurisdictions. The essential intertemporal character of this decision is
modeled as a multi-stage game to attract such foreign investment in these states. It is found that, when
states with unequal political or economic infrastructure compete, the resulting Nash equilibrium
profiles are inefficient. Under certain conditions, states that have won once, can “allow” a rival to win
in a subsequent stage. The resulting Nash Equilibrium is more efficient. If the option of “allowing” a
rival to win is not available, then states may resort to “suicide” strategies defined as outcomes created
by history of losses.