The government of a developing country wants to attract foreign direct investment

(FDI). The world lasts two periods. In period 2, the government selects a level of capital taxation, which can be either t 1/2 or t 1. In period 1 investors select the level of FDI, I e {0, 1}, on the basis of the anticipated level of taxation. The gross return to investing in the developing country in question (i.e. selecting I l) is r, and the return net of tax is (1 t)r; the net return to investing elsewhere (i.e. selecting I 0) is 1 4. The government of the developing country aims to maximise tax revenues. Taxable revenue from FDI in period 2 equals r I, and so tax revenues in period 2 are G t r I. Assume r l. (i) What is the optimal investment choice for investors? (2 marks) (ii) Find a subgame perfect equilibrium for this game. What is the equilibrium payoff level for the government? (8 marks) (iii) If the government of the developing country could commit to a level of taxation in period 1, what level of taxation would it commit to? (2 marks)