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 o f policy making are modelled formally. People are assumed perfectly mo bile between regions, but are assumed to own land only in the region o f their birth. The Nash equilibrium is shown to be efficient if and on ly if no migration (of capital or labour) is needed to achieve efficie ncy. Otherwise, tax competition leads to too little migration. Volunta ry interregional transfers will never arise in equilibrium. Despite th e inefficiency of the Nash equilibrium (when there is migration), a hi gher level of government cannot alter the equilibrium, if regional gov ernments choose policies simultaneously after the federal government h as committed to its policies.