Fiscal Competition and Migration Patterns

In this paper, we model migration patterns 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, by offering lower taxes or more public inputs, the less technologically developed country can retain part of its skilled labor force and attract skilled workers from abroad, albeit not the most qualified. 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.