Resistance to Outside Investment: A Rational Model of Surplus Destruction

If the government has the ability and willingness to redistribute the surplus created by an external investor, why do we still observe resistance to such investment, sometimes in the form of destruction of productive assets? And how does such destructive action a¤ect a government’s “investor-friendliness”? In a simple model where di¤erent social groups have di¤erent and uncertain valuation of productive investment brought in from outside, we explain such surplus destruction as a credible signal sent to the government by an a¤ected group of its low valuation. The information-constrained government values such a signal and uses it to implement a better redistribution scheme. Such destructive action is decreasing in the extent that the government cares for the a¤ected group. Under full information, the government taxes the investor if the investor’s marginal valuation of the investment is higher than that of the society and subsidises the investor otherwise. Surplus destruction makes the government weaker in negotiating with the investor, i.e. more prone to providing subsidies to compensate for the investor’s loss due to destruction. If two governments compete to attract the same investor, we show that there is a “subsidy war”, and while the investor bene…ts from such competition at the cost of the societies, there may be an ex-post ine¢ ciency, i.e. investment can move to the less pro…table destination. Resistance to investment may have counterintuitive e¤ects on a government’s negotiating power under competition.