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Competing for Capital When Labour is Heterogeneous

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Author Info
Sato, Yasuhiro
Thisse, Jacques-François

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Abstract

This paper investigates the impacts of capital mobility and tax competition in a setting with imperfect matching between firms and workers. The small country attracts fewer firms than the large one but accommodates a share of the industry that exceeds its capital share - a reverse home market effect. This allows the small country to be more aggressive and to set a higher tax rate than the large one, thus implying that tax competition reduces international inequalities. However, the large country always attains a higher utility than does the small country. Our model thus encapsulates both the 'importance of being small' and the 'importance of being large'. Last, tax harmonization benefits to the small country but is detrimental to the large one.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6186.

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Date of creation: Mar 2007
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Handle: RePEc:cpr:ceprdp:6186

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Related research
Keywords: capital mobility; fiscal competition; local labour markets; reverse home market effect;

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Find related papers by JEL classification:
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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  25. Head, Keith & Mayer, Thierry, 2004. "The empirics of agglomeration and trade," Handbook of Regional and Urban Economics, in: J. V. Henderson & J. F. Thisse (ed.), Handbook of Regional and Urban Economics, edition 1, volume 4, chapter 59, pages 2609-2669 Elsevier. [Downloadable!] (restricted)
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  26. Cremer, Helmuth & Pestieau, Pierre, 2004. "Factor mobility and redistribution," Handbook of Regional and Urban Economics, in: J. V. Henderson & J. F. Thisse (ed.), Handbook of Regional and Urban Economics, edition 1, volume 4, chapter 57, pages 2529-2560 Elsevier. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Sebastian Krautheim & Tim Schmidt-Eisenlohr, 2009. "Heterogeneous Firms, 'Profit Shifting' FDI and International Tax Competition," Economics Working Papers ECO2009/15, European University Institute. [Downloadable!]
  2. Kristian Behrens & Yasuhiro Sato, 2006. "`Brain drain' without migration: Capital market integration and capital-skill complementarities," Economics Bulletin, Economics Bulletin, vol. 18(2), pages 1-9. [Downloadable!]
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