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Competing for capital when labor is heterogeneous

  • Yasuhiro Sato

    (Graduate School of Environmental Studies, Nagoya University)

  • Jacques-Francois Thisse

    (CORE, Universite catholique de Louvain)

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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Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-456.

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Length: 40 pages
Date of creation: Dec 2006
Date of revision:
Handle: RePEc:tky:fseres:2006cf456
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