International asset trade, capital income taxation, and specialization patterns

This paper constructs a small economy version of dynamic Heckscher-Ohlin models with overlapping generations and analyzes effects of capital income taxation on the specialization pattern of the country. It is shown that once international asset trade is allowed, in the presence of international technological asymmetries, a small country eventually leads to perfect specialization in our overlapping generations model. It is also shown that the residence-based tax has no effect on the specialization pattern while the source-based tax has a negative effect on capital accumulation and thereby it can affect the specialization pattern of the small country.