A Simple Model of Corporate Bailouts in a Globalized Economy*

AbstractIn this paper, we explore how globalization influences the decision of governments to rescue inefficient domestic firms when bailouts affect firms’ markup. We develop a model of international trade in which immobile domestic‐owned enterprises (DOEs) compete with foreign‐owned enterprises (FOEs) in an oligopolistic market. The decision to bail out DOEs leads to lower corporate tax revenues if FOEs are immobile, whereas tax revenues might increase if FOEs are mobile. Interestingly, the mobility of FOEs makes governments more prone to rescuing inefficient domestic firms because tax competition reduces the opportunity cost of a bailout policy in terms of public good provision.