Do Countries Compensate Firms for International Wage Differentials?

Ferdinand Mittermaier and Johannes Rincke ()

No 3197, CESifo Working Paper Series from CESifo

Abstract: We address the role of labor cost differentials for national tax policies. Using a simple theoretical framework with two countries competing for a mobile firm, we show that in a bidding race for FDI, it is optimal for governments to compensate firms for international labor cost differentials. Using panel data for western Europe, we then put the model prediction to an empirical test. Exploiting exogenous variation in labor cost differentials induced by the breakdown of communism in eastern Europe, we find strong support for the model prediction that countries with relatively high labor costs tend to set lower tax rates in order to attract mobile capital. Our key result is that an increase in the unit labor cost differential by one standard deviation decreases the statutory tax rate by 7.3 to 7.5 percentage points.

Keywords: foreign direct investment; corporate taxation; labor costs (search for similar items in EconPapers)
JEL-codes: F23 H25 H73 (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.cesifo.org/DocDL/cesifo1_wp3197.pdf (application/pdf)

Related works:
Journal Article: Do countries compensate firms for international wage differentials? (2013)
Working Paper: Do countries compensate firms for international wage differentials? (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_3197

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().