Competing for Capital When Labour is Heterogeneous

41 Pages Posted: 20 May 2008

See all articles by Yasuhiro Sato

Yasuhiro Sato

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE); Nagoya University

Jacques-François Thisse

Catholic University of Louvain (UCL); Centre for Economic Policy Research (CEPR)

Date Written: March 2007

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

JEL Classification: F21, H31, J31

Suggested Citation

Sato, Yasuhiro and Thisse, Jacques-François, Competing for Capital When Labour is Heterogeneous (March 2007). CEPR Discussion Paper No. DP6186. Available at SSRN: https://ssrn.com/abstract=1133830

Yasuhiro Sato (Contact Author)

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium

Nagoya University ( email )

Furo-cho, Chikusa-ku
Nagoya-City, 4648601
Japan

Jacques-François Thisse

Catholic University of Louvain (UCL) ( email )

Place des Doyens 1
Louvain-la-Neuve, 1348
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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