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Competing for capital when labor is heterogeneous

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Listed author(s):
  • Sato, Yasuhiro
  • Thisse, Jacques-Francois

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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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 51 (2007)
Issue (Month): 8 (November)
Pages: 2054-2079

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Handle: RePEc:eee:eecrev:v:51:y:2007:i:8:p:2054-2079
Contact details of provider: Web page: http://www.elsevier.com/locate/eer

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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
  • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
  • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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Cited by:

  1. Rüdiger Pethig & Frieder Kolleß, 2009. "Asymmetric capital-tax competition, unemployment and losses from capital market integration," MAGKS Papers on Economics 200940, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  2. Krautheim, Sebastian & Schmidt-Eisenlohr, Tim, 2011. "Heterogeneous firms, ‘profit shifting’ FDI and international tax competition," Journal of Public Economics, Elsevier, vol. 95(1), pages 122-133.
  3. Yasuhiro Sato & Kristian Behrens, 2006. "`Brain drain' without migration: Capital market integration and capital-skill complementarities," Economics Bulletin, AccessEcon, vol. 18(2), pages 1-9.
  4. Kaz Miyagiwa & Yasuhiro Sato, 2012. "Free Entry, Regulatory Competition, and Globalization," Emory Economics 1202, Department of Economics, Emory University (Atlanta).
  5. Kato, Hayato, 2015. "Lobbying and Tax Competition in an Agglomeration Economy: A Reverse Home Market Effect," CCES Discussion Paper Series 56, Center for Research on Contemporary Economic Systems, Graduate School of Economics, Hitotsubashi University.
  6. Miyagiwa, Kaz & Sato, Yasuhiro, 2014. "Free entry and regulatory competition in a global economy," Journal of Public Economics, Elsevier, vol. 118(C), pages 1-14.
  7. Yu-Bong Lai, 2014. "Asymmetric tax competition in the presence of lobbying," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(1), pages 66-86, February.
  8. repec:ebl:ecbull:v:18:y:2006:i:2:p:1-9 is not listed on IDEAS
  9. OGAWA Hikaru & OSHIRO Jun & SATO Yasuhiro, 2012. "Capital Mobility—a resource curse or blessing? How, when, and for whom?," Discussion papers 12063, Research Institute of Economy, Trade and Industry (RIETI).

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