On the Choice Between Capital and Labor Mobility: The Small Country Case

In this paper different policies of a small high-wage country towards factor mobility are studied. If technologies are identical throughout the world, then the optimal capital export policy leads to the same national income as the optimal immigration policy. In contrast, the optimal capital export policy is inferior to the optimal immigration policy if the country exhibits a technological superiority. Moreover, national income can be increased without limits by taxation of factor inflows if both factors are imported. If there exists a third immobile factor, permitting a free flow of labor and capital maximizes national income.