In a dynamic two-period game between two symmetric countries, we show that a unique subgame-perfect equilibrium arises during the initial stage of the game. A mixed taxation regime arises in the equilibrium where one country adopts a non-preferential taxation regime while its competitor adopts a preferential taxation regime. The country with a non-preferential taxation regime earns a higher tax revenue compared to the country with a preferential taxation regime. A tax holiday does not arise during the initial stage of the game when the size of the mobile capital base that enters during the later stage is considerably larger than the size of the mobile capital base that enters the economy during the initial stage. We provide the complete characterization and proof of the uniqueness of the mixed strategy Nash equilibrium.
JEL classification: F21, H21, H25, H87