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In this paper, the authors analyze competition among jurisdictions to attract firms through low taxes on capital and/or high level of public goods, which enhance firms' productivity. They assume that the competing jurisdictions are different in (population) size and that the mobility of capital is costly. They find that for moderate mobility costs, small economies can attract foreign capital if they supply higher levels of public goods than larger jurisdictions, without being tax havens. If mobility costs are high, they recover the classical result that small jurisdictions are attractive to foreign capital if they engage in tax dumping. Finally, they show that there exists a subset of mobility costs for which the differentiation in public goods across jurisdictions is not able to relax tax competition.
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