Foreign investment affects land prices as well as domestic capital. A permanent increase in net foreign investment can reduce steady-state welfare if a consequence is higher land values. Other things equal, more crowded countries have higher land prices and lower permanent welfare, but their net foreign indebtedness depends on technology, savings behavior, and the interest rate. Even when the domestic capital stock is not affected, a land tax raises steady-state welfare.

While foreign investment augments the capital stock, it also affects land prices. If it causes land values to rise, then the resulting capital gain benefits current landowners, but the perma nent effect can be to reduce welfare. Other things equal, more-crowde d countries have higher land prices and lower steady-state welfare, b ut their net foreign indebtedness depends on technology, savings beha vior, and the interest rate. Even when it does not affect the domesti c capital stock, a land tax raises steady-state welfare.

Journal Article Trade and Industrial Policy Under Oligopoly: Reply Get access Jonathan Eaton, Jonathan Eaton University of Virginia Search for other works by this author on: Oxford Academic Google Scholar Gene M. Grossman Gene M. Grossman Princeton University Search for other works by this author on: Oxford Academic Google Scholar The Quarterly Journal of Economics, Volume 103, Issue 3, August 1988, Pages 603–607, https://doi.org/10.2307/1885548 Published: 01 August 1988