DISTRIBUTION OF FACTOR ENDOWMENTS AND TAX COMPETITION

This paper analyzes a Nash tax competition between two heterogeneous r egions that differ in their endowments of production factors: mobile c apital and immobile labor. Each region uses a unit tax on capital to f inance local public service. The effects of the differences in the fac tor endowments on the equilibrium tax rates, relative utility levels, and the efficiency of the public service provision are analyzed. When the income effect on the public service is zero, the poor large region chooses a higher tax rate and has a lower utility than its rival, but the poor small region may choose a lower tax rate and attain a higher utility. When the public service is a normal good, the poor large reg ion may choose a lower tax rate and has a higher utility than the riva l if its share of labor endowment is not very high. The rich region wi th a higher tax rate under-provides the public service, but the poor r egion may provide an efficient level of the public service.