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Competing for capital when labor is heterogeneous

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Author Info
Yasuhiro Sato (Graduate School of Environmental Studies, Nagoya University)
Jacques-Francois Thisse (CORE, Universite catholique de Louvain)

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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 less 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 CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-456.

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Length: 40 pages
Date of creation: Dec 2006
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Handle: RePEc:tky:fseres:2006cf456

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  20. 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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