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Competing for Capital in a "Lumpy" World

  • Kind, H.J.
  • Knarvik, K.H.M.
  • Schjelderup, G.

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. If 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 Norwegian School of Economics and Business Administration- in its series Papers with number 7/99.

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Length: 26 pages
Date of creation: 1999
Date of revision:
Handle: RePEc:fth:norgee:7/99
Contact details of provider: Postal: NORWEGIAN SCHOOL OF ECONOMICS AND BUSINESS ADMINISTRATION, HELLEVEIEN 30, 5035 BERGEN SANDVIKEN NORWAY.
Phone: 5595 9000
Fax: 5595 9100
Web page: http://www.nhh.no/
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  1. Haufler, Andreas & Wooton, Ian, 1999. "Country size and tax competition for foreign direct investment," Journal of Public Economics, Elsevier, vol. 71(1), pages 121-139, January.
  2. Ludema, Rodney D & Wooton, Ian, 1998. "Economic Geography and the Fiscal Effects of Regional Integration," CEPR Discussion Papers 1822, C.E.P.R. Discussion Papers.
  3. Clemens Fuest & Bernd Huber, 1999. "Tax Coordination and Unemployment," International Tax and Public Finance, Springer, vol. 6(1), pages 7-26, February.
  4. 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.
  5. Gordon, Roger H, 1986. "Taxation of Investment and Savings in a World Economy," American Economic Review, American Economic Association, vol. 76(5), pages 1086-1102, December.
  6. Jacob Frenkel & Assaf Razin & Efraim Sadka, 1991. "International Taxation in an Integrated World," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262512149, June.
  7. Jaffe, Adam B & Trajtenberg, Manuel & Henderson, Rebecca, 1993. "Geographic Localization of Knowledge Spillovers as Evidenced by Patent Citations," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 577-98, August.
  8. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  9. Razin, Assaf & Sadka, Efraim, 1991. "Efficient investment incentives in the presence of capital flight," Journal of International Economics, Elsevier, vol. 31(1-2), pages 171-181, August.
  10. Venables, Anthony J, 1993. "Equilibrium Locations of Vertically Linked Industries," CEPR Discussion Papers 802, C.E.P.R. Discussion Papers.
  11. Bucovetsky, Sam & Wilson, John Douglas, 1991. "Tax competition with two tax instruments," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 333-350, November.
  12. Wilson, J.D., 1990. "Tax Competition With Interregional Differences In Factor Endowments," Working Papers 4, John Deutsch Institute for the Study of Economic Policy.
  13. Bjerksund, Petter & Schjelderup, Guttorm, 1998. "The political economy of capital controls and tax policy in a small open economy," European Journal of Political Economy, Elsevier, vol. 14(3), pages 543-559, August.
  14. Haaparanta, Pertti, 1996. "Competition for foreign direct investments," Journal of Public Economics, Elsevier, vol. 63(1), pages 141-153, December.
  15. David G. Hartman, 1985. "The Welfare Effects of a Capital Income Tax in an Open Economy," NBER Working Papers 1551, National Bureau of Economic Research, Inc.
  16. Black, Dan A & Hoyt, William H, 1989. "Bidding for Firms," American Economic Review, American Economic Association, vol. 79(5), pages 1249-56, December.
  17. Krugman, Paul & Venables, Anthony J, 1990. "Integration and the Competitiveness of Peripheral Industry," CEPR Discussion Papers 363, C.E.P.R. Discussion Papers.
  18. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production: I--Production Efficiency," American Economic Review, American Economic Association, vol. 61(1), pages 8-27, March.
  19. Michael Keen, 1993. "The welfare economics of tax co-ordination in the European Community : a survey," Fiscal Studies, Institute for Fiscal Studies, vol. 14(2), pages 15-36, February.
  20. Krugman, Paul & Venables, Anthony J., 1995. "Globalization and the Inequality of Nations," Working Paper Series 430, Research Institute of Industrial Economics.
  21. Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, September.
  22. Michael J. Boskin & William G. Gale, 1986. "New Results on the Effects of Tax Policy on the International Location of Investment," NBER Working Papers 1862, National Bureau of Economic Research, Inc.
  23. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-99, June.
  24. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
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