published in: Journal of Economics/Zeitschrift für Nationalökonomie, 2004, 82 (2), 137-167
In this paper fiscal policy is examined for an open economy characterised by unemployment
due to efficiency wages. We allow for capital and firm mobility in a model where the
government chooses the level of wage, source-based capital and profit taxation. The taxing
choices of governments are analyzed in scenarios which differ with respect to the constraints
imposed on the set of available taxes and on the mobility of firms. As a general result, the
welfare loss from labour market imperfections increases when tax bases become
internationally mobile, which suggests an increasing relevance of domestic labour-market
reforms when tax bases become global.
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