This paper examines the tax competition for mobile capital between symmetric countries. All first-nature features (local advantages) are completely abstracted away, so agglomeration and dispersion forces come purely from the second nature—the economic linkages based on monopolistic competition, increasing returns to scale, and trade costs. A positive tax indicates a dispersion rent while a negative tax implies an agglomeration rent. This paper finds that the income effect and the pro-competitive effect together foster a dispersion force that can be explored by the local government in the form of a positive tax rate. Joint with Dao-Zhi Zeng and Shin-Kun Peng.

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