with tF denoting the tax rate if the individual would emigrate (the “foreign” tax rate), and
x[A] denoting the costs that have to be incurred in the case of emigration. These costs can
be thought of as the monetary representation of the “psychological” stress of losing contact
with one’s acquaintances, or as the costs of relocating physical assets. They are incurred as
a fraction of income because more wealthy individuals usually own more assets and will thus
have higher relocation costs.7
The costs are modeled as a function of the extent of globalization A with dx/dA < 0. This
assumption captures the fact that one eect of globalization is the lowering of transportation
cost, which implies that it becomes easier to visit one’s acquaintances in the home country, or
to relocate physical assets. Another aspect relates to the spread of English as a modern Lingua
Franca and the emergence of a global culture, both of which might reduce the psychological
costs of moving to a foreign country.
Solving equation 6 for the equilibrium domestic tax rate gives t = tF + x[A]. It is straight-
forward to show that dt/dA = dx/dA < 0. That is, the equilibrium tax rate is a (decreasing)
function of the extent of globalization, i. e. t ≡ t*[A] (it is also a function of the foreign tax
rate, but we suppress this parameter in the following). This is a reasonable result given that
globalization is often associated with intensifying tax competition and a decline in the tax
burden of the wealthy.
2.3 The composition of public education expenditures
Taking into account equations 2 and 3, and that the eventual tax rate is a function of the
level of globalization, the objective function of the government can be rewritten as follows
max 'ʃ z ■' = πb + ,ʌ//. (t*[A] fh — (M[L]gL + gH)), (7)
with the constraint t*[A] ffH ≥ M[L] gL + gH.
Differentiating the objective function with respect to the g⅛ and assuming an interior solu-
tion8, we can show that the g⅛ will be chosen such that
— = (t*[A]χ[A])1^ ^h, (8)
gL "/.
with χ[A] = ph[A]∕pl[A].
This equation implies that in equilibrium, the relative amount of resources allocated to
higher education will increase with the equilibrium tax rate, the relative value of the output
prices, and the relative value of the endowment of the high-ability individuals.
7We realize that this argument for treating the emigration costs as proportional to income does not equally
well apply to the costs due to ‘psychological” stress, but the proportionality assumption might still be appro-
priate because high-ability individuals usually have a more “valuable” network of acquaintances in the home
country.
8This requires, in particular, that the tax rate in equilibrium t*[ff] is sufficiently large