Corporate Tax Competition in the Presence of Unemployment

We analyze the corporate tax competition between two countries in a two-sector model in which one sector is an oligopoly and oligopolists can choose their location between the two countries. Importantly, our model considers imperfect labor markets, where the wage rates in both countries are fixed, causing unemployment to appear. Under such framework, we show that a unique and stable Nash equilibrium of corporate taxes exists and discuss the properties of the equilibrium tax rates. We also examine the relation between the wage rates and equilibrium tax rates as well as that between the share of equities for oligopoly profits and equilibrium tax rates.