This paper investigates the impacts of capital mobility and tax competition in a setting with
imperfect matching between firms and workers. The small country attracts less firms than the
large one but accommodates a share of the industry that exceeds its capital share - a reverse
home market effect. This allows the small country to be more aggressive and to set a higher tax
rate than the large one, thus implying that tax competition reduces international inequalities.
However, the large country always attains a higher utility than does the small country. Our
model thus encapsulates both the "importance of being small" and the "importance of being
large". Last, tax harmonization benefits to the small country but is detrimental to the large one.
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