International relocation, the real exchange rate and welfare

We develop a two-country model of international trade with endogenous firm location to investigate the impact of a rise in the corporation tax rate of one country on the spatial distribution of firms across the two countries. We show that (i) a rise in the corporation tax rate of country I leads to the relocation of some firms to country 2, and (ii) this relocation increases (resp. decreases) welfare in country I when this country is poor (resp. rich) in the sense that its agents hold a less (resp. more) than proportionate share of world equities. (c) 2004 Elsevier B.V. All rights reserved.