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Competing for Capital in a 'Lumpy' World

  • Kind, Hans Jarle
  • Schjelderup, Guttorm
  • Ulltveit-Moe, Karen-Helene

This paper uses a new economic geography model to analyze tax competition between two countries trying to attract internationally mobile capital. Each government may levy a source tax on capital and a lump sum tax on fixed labor. If industry is concentrated in one of the countries, the analysis finds that the host country will gain from setting its source tax on capital above that of the other country. In particular, the host may increase its welfare per capita by setting a positive source tax on capital and capture the positive externality that arise in the agglomeration. If industry is not concentrated, however, both countries will subsidize capital.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2188.

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Date of creation: Jul 1999
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Handle: RePEc:cpr:ceprdp:2188
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