Andersson, Fredrik; Konrad, Kai A.
Human capital investment and globalization in extortionary states.
In: Journal of Public Economics, Vol. 87, No. 7-8: pp. 1539-1555
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This paper considers education investment and public education policy in closed and open economies with an extortionary government. The extortionary government in a closed economy chooses an education policy in order to overcome a hold-up problem of time-consistent taxation similar to benevolent governments. The two types of government differ in their education policies if highly productive labor is mobile. Extortionary governments' incentives for a policy that stimulates higher private education efforts vanish; instead they have incentives to prevent individuals from mobility-increasing education investment. Tax competition therefore reduces hold-up problems of time-consistent extortionary taxation, but introduces other distortions that reduce workers' utility. © 2002 Elsevier B.V. All rights reserved.