Fiscal competition and two-way migration

In this paper, we model two-way migration as the outcome of strategic public policies adopted by competing jurisdictions. We assume that two economies, distinguished by different technological levels, host a continuum of mobile individuals with varying skill levels. To maximize their net revenues, governments compete for mobile workers by taxing wages and providing a public good that enhances firm productivity (public input). We show that the most skilled workers migrate to the technologically advanced economy. However, the government in the less technologically developed economy can retain some of its skilled workers and attract workers from abroad by offering lower taxes or more public inputs. As a result, a two-way migration pattern emerges, driven by governments’ strategic policy choices. Finally, the introduction of heterogeneity in population size does not significantly alter the results.
Keywords: Bilateral migration; Tax competition; Heterogeneous skills; Technological gap; Policy competition

JEL Classifications: H20, H32, H54, H87, F22, F60