RENT-SEEKING AND TAX COMPETITION

Regional or local governments often appear to favour the interests of those who own land in the region. Here the implications of this sort of policy making are modelled formally. People are assumed perfectly mobile between regions, but are assumed to own land only in the region of their birth. The Nash equilibrium is shown to be efficient if and only if no migration (of capital or labour) is needed to achieve efficiency. Otherwise, tax competition leads to too little migration. Voluntary interregional transfers will never arise in equilibrium. Despite the inefficiency of the Nash equilibrium (when there is migration), a higher level of government cannot alter the equilibrium, if regional governments choose policies simultaneously after the federal government has committed to its policies.