Do Countries Compensate Firms for International Wage Differentials?

Journal article

Publication Details

Author(s): Mittermaier F, Rincke J
Journal: Journal of Public Economics
Publisher: Elsevier
Publication year: 2013
Volume: 102
Pages range: 23-36
ISSN: 0047-2727
Language: English


We address the role of labor cost differentials for national tax policies. Modeling a tax competition race between two countries competing for a population of mobile firms, we show that in equilibrium, the high-wage country charges a lower tax than the low-wage country. Moreover, under tax competition the high-wage country attracts more firms than in a setting without taxation. Exploiting exogenous variation in labor cost differentials induced by the breakdown of communism in eastern Europe, we find that tax policies are in line with the model prediction. Our most conservative estimates suggest that a one dollar increase in the compensation cost differential (in prices as of 2000) triggers a cut of the statutory corporate income tax rate by about one percentage point.

FAU Authors / FAU Editors

Rincke, Johannes Prof. Dr.
Lehrstuhl für Volkswirtschaftslehre, insbesondere Wirtschaftspolitik

External institutions with authors

Ludwig-Maximilians-Universität (LMU)

How to cite

Mittermaier, F., & Rincke, J. (2013). Do Countries Compensate Firms for International Wage Differentials? Journal of Public Economics, 102, 23-36.

Mittermaier, Ferdinand, and Johannes Rincke. "Do Countries Compensate Firms for International Wage Differentials?" Journal of Public Economics 102 (2013): 23-36.


Last updated on 2018-17-07 at 16:23