Capital Mobility, Wage Bargaining and Social Insurance Policies in an Economic Union
International Tax and Public Finance, Vol. 3, No. 4, 1996
Posted: 4 May 1998 Last revised: 25 Jan 2016
Date Written: 1996
In a two-country model with mobile capital we analyze decentralized social insurance policies. These policies are a compromise between the preferences of workers and capital owners. Due to wage bargaining, worker-based social insurance contributions are borne by capital owners. These contributions affect the profitability of investment, and consequently the direction and size of capital flows. Countries will take account of these effects in determining social insurance policy. Noncooperative decision making results in tax competition and an underprovision of social insurance. In addition, increasing economic integration, represented by increasing capital mobility, could imply a divergence of social insurance levels in the two countries.
JEL Classification: H70, F21
Suggested Citation: Suggested Citation