Do Agency Costs Affect the Optimal Matching Grant Rate in a Model of Tax Competition with Labor Market Imperfections?
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We examine the effect horizontal fiscal externalities and labor market imperfections have on the optimal matching grant rate in a model where agency costs are inevitable. Since we take agency costs into account, the main results would be quite different from the standard conclusions of tax competition literature. We find that the degree of agency costs will determine the relationship between tax competition and the optimal matching grant rate and the relationship between unemployment rate and the optimal matching grant rate.
Tax competition, Unemployment rate, Agency costs