Coherent Identifier About this item: 20.500.12592/qzm031

A bargaining model of tax competition




The second requires the ratio ni/θi to be the same for every firm that locates in region i. Since each firm’s marginal product of labour is determined by this ratio, this condition ensures that the marginal product of labour is equalized across the firms that locate in region i. The third condition states that each firm locates in the region in which capital’s contribution to output is maximized. [...] Suppose that a small but positive measure of firms is moved from region h to region j. The firms entering region j are provided with labour by shifting labour away from the firms that were already in that region, so labour’s contribution to the output of the new firms is exactly offset by the fall in labour’s contribution to the output of the existing firms. [...] Likewise, the departure of the firms leaving region h means that more labour is available to the remaining firms, so that the loss of labour’s contribution to the output of the departing firms is offset by an increase in labour’s contribution to the output of the firms that remain. [...] To simplify the analysis in this section, it is assumed that (a) the financial con- cessions, like the profits tax itself, do not distort the hiring decision, and (b) the offer made by each government to a particular firm specifies the maximal after-tax profits that the firm would earn in the region. [...] If it locates in region i, it employs the quantity of labour that satisfies the condition ( ) ′ ni f = wi θi The ratio ni/θi is the same for every firm in the region, and since the wage rate clears the regional labour market, this ratio must be equal to ≡ ∫ Ni µi θ L idP i The gross profits of a firm in this region are equal to θ r(µ ).2i i The resources available to region i, denoted Ri, are equa



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