The mix of public inputs under tax competition

This paper analyzes how the use of taxation on mobile factors affects the mix of "factor-specific public inputs" set by regional governments (e.g., manpower training for labor; infrastructure for capital). These inputs are defined such that they have impacts analogous to the Harrod-neutral and Solow-neutral technical change. Regional governments provide two types of public input that, respectively, complement immobile and mobile factors. It is shown that the nature of the expenditure mix depends on the elasticity of substitution between these factors. Too much tax revenue is spent on public input complementing mobile (immobile) factors if the elasticity is more than (less than) one, but the mix of these inputs is efficient if the elasticity is equal to one. (C) 2004 Elsevier Inc. All rights reserved.