State Tax and Policy Competition For Mobile Capital

Jeffrey D. Petchey and Perry Shapiro

The Economic Record, 2002, vol. 78, issue 241, 175-185

Abstract: We characterise a model in which states engage in tax and policy competition with one another to attract mobile capital. The mix of policies chosen is shown to depend on the interaction between a desire to exploit capital for the benefit of domestic residents (labour) and a net marginal externality generated by capital. It is also argued that competition between states leads to an inefficient supply and geographical distribution of capital within the domestic economy if capital markets are not fully integrated.

Date: 2002
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