Competing for Capital When Labor is Heterogeneous
CORE Discussion Paper No. 2005/61
20 Pages Posted: 10 Jul 2006
Date Written: September 2005
This paper investigates the impacts of capital mobility and tax competition in a setting with imperfect matching between firms and workers. The small country always gains and the large country always loses from tax competition, thus implying tax competition leads to redistribution from the large to the small country. However, the large country always attains a higher utility than does the small country. These results imply that our model encapsulates both the "importance of being small" as well as the "importance of being large". We also show that tax harmonization leads to redistribution from the large to the small country.
Keywords: fiscal competition, local labor markets, capital mobility
JEL Classification: F21, H32, J31
Suggested Citation: Suggested Citation