Competition for migrants in a federation: Tax or transfer competition?

This paper provides an analysis of competition for migrants. Competing in taxes (transfers) renders migration flows less (more) elastic with respect to changes in fiscal policy. Jurisdictions with aligned preferences (i.e. jurisdictions that maximize the interest of the same type of households, either mobile or immobile households) prefer to reduce the competitive pressure and compete in taxes. Jurisdictions with distinct preferences, on the other hand, prefer to expose themselves to more competitive pressure and compete in transfers. This paper offers insights into the optimal use and design of transfers and helps interpret existing empirical evidence.