Competing for Capital When Labour is Heterogeneous

Yasuhiro Sato and Jacques Thisse ()

No 6186, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 fewer 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.

Keywords: capital mobility; fiscal competition; local labour markets; reverse home market effect (search for similar items in EconPapers)
JEL-codes: F21 H31 J31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe and nep-ure
Date: Written 2007-03
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Related works:
Working Paper: Competing for capital when labor is heterogeneous (2005)
Working Paper: Competing for capital when labor is heterogeneous (2006)
Journal Article: Competing for capital when labor is heterogeneous (2007)
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