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How labor market rigidities shape business taxation in a global economy?


  • Nelly Exbrayat

    () (CERDI - Centre d'Études et de Recherches sur le Développement International - UdA - Université d'Auvergne - Clermont-Ferrand I - CNRS - Centre National de la Recherche Scientifique)

  • Carl Gaigné

    (INRA-ESR - Unité d'économie et de sociologie rurales - INRA - Institut National de la Recherche Agronomique)

  • Stéphane Riou

    () (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique)


We investigate the impact of trade liberalization upon the taxation of capital within a context of labor market rigidities. Using a model of trade and location, we show that labor market imperfections not only strengthen tax competition but also affect the relationship between trade integration and tax policies. Capital taxation follows a J-shaped relationship with trade costs when labor markets are flexible, whereas it may increase with falling trade costs in the presence of trade unions acting as Stackelberg leaders or playing simultaneously with governments. In addition, we analyze the outcome which arises from di§erences between the various countries' labor market institutions. Trade liberalization reduces the international differences in wage and capital taxation, making the unionized country more attractive.

Suggested Citation

  • Nelly Exbrayat & Carl Gaigné & Stéphane Riou, 2010. "How labor market rigidities shape business taxation in a global economy?," Post-Print halshs-00537021, HAL.
  • Handle: RePEc:hal:journl:halshs-00537021
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    References listed on IDEAS

    1. Manuel Leite-Monteiro & Maurice Marchand & Pierre Pestieau, 2003. "Employment Subsidy with Capital Mobility," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(2), pages 327-344, April.
    2. Carl Gaigné & Stéphane Riou, 2007. "Globalization, Asymmetric Tax Competition, and Fiscal Equalization," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(5), pages 901-925, October.
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    Cited by:

    1. Nelly Exbrayat & Benny Geys, 2011. "Trade Integration and Business Tax Differentials: Theory and Evidence from OECD Countries," Post-Print halshs-00617043, HAL.


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