We analyze the welfare impact of entrepreneur mobility in a two-country model. Increasing returns in production yield multiple equilibria that are stable under adaptive learning. Governments compete for the mobile resource by setting income taxes. We show that large welfare gains can arise from noncooperative taxation. If expectational barriers prevent the realization of high output equilibria, tax competition can sufficiently perturb expectations so that high steady states become attainable. Once in a high production regime, governments may institute cooperative tax increases or reductions so as to bring the economy to the global joint optimum without disturbing the regime.
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Paper provided by University of New Orleans, Department of Economics and Finance in its series Working Papers with number
2005-09.
Find related papers by JEL classification: H2 - Public Economics - - Taxation, Subsidies, and Revenue F2 - International Economics - - International Factor Movements and International Business D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
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