Competing for capital when labor is heterogeneous

Yasuhiro Sato and Jacques Thisse ()

No CIRJE-F-456, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

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 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.

Date: Written 2006-12
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http://www.e.u-tokyo.ac.jp/cirje/research/dp/2006/2006cf456.pdf (application/pdf)

Related works:
Working Paper: Competing for Capital When Labour is Heterogeneous (2007)
Working Paper: Competing for capital when labor is heterogeneous (2005)
Journal Article: Competing for capital when labor is heterogeneous (2007)
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