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Which Communities should be afraid of Mobility? The Effects of Agglomeration Economies on the Sensitivity of Firm Location to Local Taxes

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Author Info
Jordi Jofre-Monseny ()
Albert Solé-Ollé ()
Abstract

This paper examines the effects of agglomeration economies (AE) on the sensitivity of firm location to tax differentials. An initial reading of the story suggests that, with AE, when a firm moves into a community attracted by a tax reduction, other firms may decide to move in as well. This suggests that AE increase the sensitivity of firm location to local taxes. However, a second version of the story reads that, if economic activities are highly concentrated in space, AE might offset any tax differential, hence suggesting a reduction in this sensitivity. This paper provides a theoretical model of intraregional firm location with Marshallian AE that is able to generate both hypotheses: AE increase (decrease) the effect of taxes when locations are (are not) of a similar size. We then use Spanish municipal data for the period 1995-2002 to test these hypotheses, analyzing the combined effect of local business taxes and Marshallian AE on the intraregional location of employment. In line with the theory, a municipality with stronger AE experiences lower (higher) tax effects if it is sufficiently dissimilar (similar) to its neighbors in terms of size.

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Paper provided by CESifo GmbH in its series CESifo Working Paper Series with number CESifo Working Paper No. 2311.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2311

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Related research
Keywords: local taxes agglomeration economies local employment growth instrumental variables

Find related papers by JEL classification:
H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
R30 - Urban, Rural, and Regional Economics - - Production Analysis and Firm Location - - - General

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  2. Marius Brülhart & Mario Jametti & Kurt Schmidheiny, 2007. "Do Agglomeration Economies Reduce the Sensitivity of Firm Location to Tax Differentials?," Economics Working Papers 1062, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
    Other versions:
  3. Robin Boadway & Katherine Cuff & Nicolas Marceau, 2004. "Agglomeration Effects and the Competition for Firms," International Tax and Public Finance, Springer, vol. 11(5), pages 623-645, 09. [Downloadable!]
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  7. Goolsbee, Austan & Maydew, Edward L., 2000. "Coveting thy neighbor's manufacturing: the dilemma of state income apportionment," Journal of Public Economics, Elsevier, vol. 75(1), pages 125-143, January. [Downloadable!] (restricted)
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  12. Andrew F. Haughwout & Robert P. Inman & Steven Craig & Thomas Luce, 2003. "Local Revenue Hills: Evidence from Four U.S. Cities," NBER Working Papers 9686, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Fernandez, Gonzalo E., 2005. "A note on tax competition in the presence of agglomeration economies," Regional Science and Urban Economics, Elsevier, vol. 35(6), pages 837-847, November. [Downloadable!] (restricted)
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  15. Devereux, Michael P. & Griffith, Rachel & Simpson, Helen, 2007. "Firm location decisions, regional grants and agglomeration externalities," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 413-435, April. [Downloadable!] (restricted)
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  17. Feld, Lars P. & Kirchgassner, Gebhard, 2003. "The impact of corporate and personal income taxes on the location of firms and on employment: some panel evidence for the Swiss cantons," Journal of Public Economics, Elsevier, vol. 87(1), pages 129-155, January. [Downloadable!] (restricted)
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  18. Burbidge, John & Cuff, Katherine & Leach, John, 2006. "Tax competition with heterogeneous firms," Journal of Public Economics, Elsevier, vol. 90(3), pages 533-549, February. [Downloadable!] (restricted)
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