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Fiscal Competition, Capital-Skill Complementarity, and the Composition of Public Spending

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  • Rainald Borck

Abstract

Following Keen and Marchand (1997), the paper analyses the effect of fiscal competition on the composition of public spending in a model where capital and skilled workers are mobile while low skilled workers are immobile. Taxes are levied on capital and labour. Each group of workers benefits from a different kind of public good. Mobility of skilled workers provides an incentive for jurisdictions to spend 'too much' on public goods benefitting the skilled and 'too little' on those benefitting low skilled workers. In the case of capital-skill complementarity, this incentive is strengthened. The analysis is then extended to allow for mobility of unskilled labour.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.43395.de/dp504.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 504.

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Length: 14 p.
Date of creation: 2005
Date of revision:
Handle: RePEc:diw:diwwpp:dp504

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Related research

Keywords: Tax competition; Capital skill complementarity; Public spending;

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References

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  1. Jennifer Hunt, 2000. "Why Do People Still Live in East Germany?," Discussion Papers of DIW Berlin 201, DIW Berlin, German Institute for Economic Research.
  2. Jan K. Brueckner, 1999. "Welfare Reform and the Race to the Bottom: Theory and Evidence," Southern Economic Journal, Southern Economic Association, vol. 66(2), pages 505-525, January.
  3. Zodrow, George R. & Mieszkowski, Peter, 1986. "Pigou, Tiebout, property taxation, and the underprovision of local public goods," Journal of Urban Economics, Elsevier, vol. 19(3), pages 356-370, May.
  4. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
  5. Huber, Bernd, 1999. "Tax competition and tax coordination in an optimum income tax model," Journal of Public Economics, Elsevier, vol. 71(3), pages 441-458, March.
  6. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
  7. Wilson John Douglas, 1995. "Mobile Labor, Multiple Tax Instruments, and Tax Competition," Journal of Urban Economics, Elsevier, vol. 38(3), pages 333-356, November.
  8. Griliches, Zvi, 1969. "Capital-Skill Complementarity," The Review of Economics and Statistics, MIT Press, vol. 51(4), pages 465-68, November.
  9. Bergstrom, Villy & Panas, Epaminondas E, 1992. "How Robust Is the Capital-Skill Complementarity Hypothesis?," The Review of Economics and Statistics, MIT Press, vol. 74(3), pages 540-46, August.
  10. Borck, Rainald, 2003. "Tax competition and the choice of tax structure in a majority voting model," Journal of Urban Economics, Elsevier, vol. 54(1), pages 173-180, July.
  11. KEEN, Michael & MARCHAND, Maurice, 1996. "Fiscal Competition and the Pattern of Public Spending," CORE Discussion Papers 1996001, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  12. Per Krusell & Lee E. Ohanian & Jose-Victor Rios-Rull & Giovanni L. Violante, 1997. "Capital-skill complementarity and inequality: a macroeconomic analysis," Staff Report 239, Federal Reserve Bank of Minneapolis.
  13. Matsumoto, Mutsumi, 2004. "The mix of public inputs under tax competition," Journal of Urban Economics, Elsevier, vol. 56(2), pages 389-396, September.
  14. Paolo Mauro & Antonio Spilimbergo, 1998. "How Do the Skilled and the Unskilled Respond to Regional Shocks? the Case of Spain," IMF Working Papers 98/77, International Monetary Fund.
  15. Huber, Bernd, 1999. "Tax competition and tax coordination in an optimum income tax model," Munich Reprints in Economics 19402, University of Munich, Department of Economics.
  16. Mariassunta Giannetti, 2001. "Skill Complementarities and Migration Decisions," LABOUR, CEIS, vol. 15(1), pages 1-31, 03.
  17. Mutsumi Matsumoto, 2000. "A Note on the Composition of Public Expenditure under Capital Tax Competition," International Tax and Public Finance, Springer, vol. 7(6), pages 691-697, December.
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Cited by:
  1. Lenka Šťastná, 2009. "Spatial Interdependence of Local Public Expenditures: Selected Evidence from the Czech Republic," Working Papers IES 2009/12, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Mar 2009.
  2. Andreas Kappeler & Albert Solé-Ollé & Andreas Stephan & Timo Välilä, 2012. "Does Fiscal Decentralisation Foster Regional Investment in Productive Infrastructure?," Discussion Papers of DIW Berlin 1204, DIW Berlin, German Institute for Economic Research.

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