Essays on international trade: Fiscal competition for FDI, selection bias, and corruption

Chapter one studies the relative importance of agglomeration forces, ownership of capital, and country-specific characteristics in determining optimal tax/subsidy rates of two developing countries competing for foreign direct investment (FDI). It augments previous research on tax competition for internationally mobile capital under imperfect competition and spatial agglomeration by introducing asymmetry in endowed capital stock and ownership of capital. Results show that market size and capital stock differences influence government tax policy towards FDI. In equilibrium, the larger country that has a smaller capital stock endowment receives FDI, even if it levies a profit tax on firms that locate within its national borders. The profit tax paid in equilibrium increases with greater agglomeration. Hence, firm's location depends on the size of the agglomeration force and factors that influence government tax policy towards FDI such as the market size and the capital stock endowment.; Chapter two corrects the sample-selection bias not accounted for in previous studies of the gravity model. I model the gravity equation as a selection model and estimate it using Heckman's two-step and the maximum-likelihood estimators. I find selection bias related to per-capita income, bureaucratic quality, and factors that determine the level of trade. When developing country effects are controlled for, results suggest that the selection problem is worse for developing countries. The Heckman model produces higher elasticity estimates and lower standard errors for the regression variables than does the Classical Linear Regression Model whether the gravity model is applied to a worldwide trade dataset or to developing countries.; Chapter three examines the effect of corruption on patterns of industrial specialization and trade by incorporating institutional features, along with factor endowments. I find uncorrupt government institutions to be a source of comparative advantage in a way consistent with the Hecksher-Ohlin-Vanek model. I incorporate the interaction between the level of economic development and corruption, and find that the impact and economic significance of corruption to be higher in developing countries. This supports the notion that the impact of corruption on specialization is greater in developing countries. Finally, I present results on which aspects of government corruption affect specialization.