IDEAS home Printed from https://ideas.repec.org/p/cor/louvco/2013065.html
   My bibliography  Save this paper

How to make the metropolitan area work? Neither big government, nor laissez-faire

Author

Listed:
  • GAIGNé, Carl

    (INRA, UMR 1302, SMART Rennes, France; CREATE, Laval University, Canada)

  • RIOU , Stéphane

    (Université de Lyon; Université Jean Monnet, Saint Etienne, France)

  • THISSE , Jacques

    (Université catholique de Louvain, CORE, Belgium; NRU Higher School of Economics, St Petersburg, Russia)

  • ,

Abstract

We study how political boundaries and tax competition among jurisdictions interact with the labor and land markets to determine the economic structure and performance of metropolitan areas. Contrary to general belief, institutional fragmentation and cross-border commuting need not be welfare-decreasing, but the size of the central city matters for welfare. Under tax competition the central business district is too small. Tax competition also prevents public policy enhancing global productivity to produce their full impact. Although our results support the idea of decentralizing the supply of local public services by independent jurisdictions, they also highlight the need of coordinating tax policies.

Suggested Citation

  • GAIGNé, Carl & RIOU , Stéphane & THISSE , Jacques & ,, 2013. "How to make the metropolitan area work? Neither big government, nor laissez-faire," LIDAM Discussion Papers CORE 2013065, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2013065
    as

    Download full text from publisher

    File URL: https://sites.uclouvain.be/core/publications/coredp/coredp2013.html
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Zenou,Yves, 2009. "Urban Labor Economics," Cambridge Books, Cambridge University Press, number 9780521698221.
    2. Braid, Ralph M, 1996. "Symmetric Tax Competition with Multiple Jurisdictions in Each Metropolitan Area," American Economic Review, American Economic Association, vol. 86(5), pages 1279-1290, December.
    3. Koh, Hyun-Ju & Riedel, Nadine & Böhm, Tobias, 2013. "Do governments tax agglomeration rents?," Journal of Urban Economics, Elsevier, vol. 75(C), pages 92-106.
    4. Alberto Alesina & Enrico Spolaore, 1997. "On the Number and Size of Nations," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(4), pages 1027-1056.
    5. Braid, Ralph M., 2002. "The Spatial Effects of Wage or Property Tax Differentials, and Local Government Choice between Tax Instruments," Journal of Urban Economics, Elsevier, vol. 51(3), pages 429-445, May.
    6. Combes, Pierre-Philippe & Gobillon, Laurent, 2015. "The Empirics of Agglomeration Economies," Handbook of Regional and Urban Economics, in: Gilles Duranton & J. V. Henderson & William C. Strange (ed.), Handbook of Regional and Urban Economics, edition 1, volume 5, chapter 0, pages 247-348, Elsevier.
    7. Gaigné, Carl & Riou, Stéphane & Thisse, Jacques-François, 2016. "How to make the metropolitan area work? Neither big government, nor laissez-faire," Journal of Public Economics, Elsevier, vol. 134(C), pages 100-113.
    8. Henderson, J V, 1974. "The Sizes and Types of Cities," American Economic Review, American Economic Association, vol. 64(4), pages 640-656, September.
    9. Laussel, Didier & Le Breton, Michel, 1998. "Existence of Nash equilibria in fiscal competition models," Regional Science and Urban Economics, Elsevier, vol. 28(3), pages 283-296, May.
    10. Keen, Michael & Konrad, Kai A., . "The theory of international tax competition and coordination," Chapters in Economics,, University of Munich, Department of Economics.
    11. Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, September.
    12. Glaeser, Edward L. & Kahn, Matthew E., 2004. "Sprawl and urban growth," Handbook of Regional and Urban Economics, in: J. V. Henderson & J. F. Thisse (ed.), Handbook of Regional and Urban Economics, edition 1, volume 4, chapter 56, pages 2481-2527, Elsevier.
    13. Fujita,Masahisa, 1991. "Urban Economic Theory," Cambridge Books, Cambridge University Press, number 9780521396455, January.
    14. Paul Cheshire & Stefano Magrini, 2009. "Urban growth drivers in a Europe of sticky people and implicit boundaries," Journal of Economic Geography, Oxford University Press, vol. 9(1), pages 85-115, January.
    15. Scotchmer, Suzanne, 2002. "Local public goods and clubs," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 29, pages 1997-2042, Elsevier.
    16. Epple, Dennis & Zelenitz, Allan, 1981. "The Implications of Competition among Jurisdictions: Does Tiebout Need Politics?," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1197-1217, December.
    17. Richard Baldwin & Rikard Forslid & Philippe Martin & Gianmarco Ottaviano & Frederic Robert-Nicoud, 2005. "Economic Geography and Public Policy," Economics Books, Princeton University Press, edition 1, number 7524.
    18. Ostrom, Vincent & Tiebout, Charles M. & Warren, Robert, 1961. "The Organization of Government in Metropolitan Areas: A Theoretical Inquiry," American Political Science Review, Cambridge University Press, vol. 55(4), pages 831-842, December.
    19. Edward L. Glaeser & Joshua D. Gottlieb, 2009. "The Wealth of Cities: Agglomeration Economies and Spatial Equilibrium in the United States," Journal of Economic Literature, American Economic Association, vol. 47(4), pages 983-1028, December.
    20. Cremer, Helmuth & Pestieau, Pierre, 2004. "Factor mobility and redistribution," Handbook of Regional and Urban Economics, in: J. V. Henderson & J. F. Thisse (ed.), Handbook of Regional and Urban Economics, edition 1, volume 4, chapter 57, pages 2529-2560, Elsevier.
    21. Arnott, Richard, 2007. "Congestion tolling with agglomeration externalities," Journal of Urban Economics, Elsevier, vol. 62(2), pages 187-203, September.
    22. Brülhart, Marius & Bucovetsky, Sam & Schmidheiny, Kurt, 2015. "Taxes in Cities," Handbook of Regional and Urban Economics, in: Gilles Duranton & J. V. Henderson & William C. Strange (ed.), Handbook of Regional and Urban Economics, edition 1, volume 5, chapter 0, pages 1123-1196, Elsevier.
    23. Nathaniel Baum-Snow, 2010. "Changes in Transportation Infrastructure and Commuting Patterns in US Metropolitan Areas, 1960-2000," American Economic Review, American Economic Association, vol. 100(2), pages 378-382, May.
    24. Janeba, Eckhard & Osterloh, Steffen, 2012. "Tax and the city: A theory of local tax competition and evidence for Germany," ZEW Discussion Papers 12-005, ZEW - Leibniz Centre for European Economic Research.
    25. Janeba, Eckhard & Osterloh, Steffen, 2013. "Tax and the city — A theory of local tax competition," Journal of Public Economics, Elsevier, vol. 106(C), pages 89-100.
    26. Helsley, Robert W. & Strange, William C., 1998. "Private government," Journal of Public Economics, Elsevier, vol. 69(2), pages 281-304, June.
    27. Hochman, Oded & Pines, David & Thisse, Jacques-Francois, 1995. "On the Optimal Structure of Local Governments," American Economic Review, American Economic Association, vol. 85(5), pages 1224-1240, December.
    28. Starrett, David A, 1981. "Land Value Capitalization in Local Public Finance," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 306-327, April.
    29. Richard J. Arnott & Joseph E. Stiglitz, 1979. "Aggregate Land Rents, Expenditure on Public Goods, and Optimal City Size," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 93(4), pages 471-500.
    30. Hoyt, William H., 1991. "Property taxation, Nash equilibrium, and market power," Journal of Urban Economics, Elsevier, vol. 30(1), pages 123-131, July.
    31. Braid, Ralph M., 2010. "Provision of a pure local public good in a spatial model with many jurisdictions," Journal of Public Economics, Elsevier, vol. 94(11-12), pages 890-897, December.
    32. Paul Rothstein, 2007. "Discontinuous Payoffs, Shared Resources, and Games of Fiscal Competition: Existence of Pure Strategy Nash Equilibrium," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(2), pages 335-368, April.
    33. Baldwin, Richard E. & Krugman, Paul, 2004. "Agglomeration, integration and tax harmonisation," European Economic Review, Elsevier, vol. 48(1), pages 1-23, February.
    34. Andrew F. Haughwout & Robert P. Inman, 2004. "How should suburbs help their central cities?," Staff Reports 186, Federal Reserve Bank of New York.
    35. Lindsey, Robin, 2012. "Road pricing and investment," Economics of Transportation, Elsevier, vol. 1(1), pages 49-63.
    36. Rosenthal, Stuart S. & Strange, William C., 2004. "Evidence on the nature and sources of agglomeration economies," Handbook of Regional and Urban Economics, in: J. V. Henderson & J. F. Thisse (ed.), Handbook of Regional and Urban Economics, edition 1, volume 4, chapter 49, pages 2119-2171, Elsevier.
    37. Borck, Rainald & Wrede, Matthias, 2009. "Subsidies for intracity and intercity commuting," Journal of Urban Economics, Elsevier, vol. 66(1), pages 25-32, July.
    38. Cremer, Helmuth & De Kerchove, Anne-Marie & Thisse, Jacques-Francois, 1985. "An economic theory of public facilities in space," Mathematical Social Sciences, Elsevier, vol. 9(3), pages 249-262, June.
    39. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416-416.
    40. Edward L. Glaeser & Matthew E. Kahn, 2001. "Decentralized Employment and the Transformation of the American City," Harvard Institute of Economic Research Working Papers 1912, Harvard - Institute of Economic Research.
    41. Hoyt, William H., 1992. "Market power of large cities and policy differences in metropolitan areas," Regional Science and Urban Economics, Elsevier, vol. 22(4), pages 539-558, November.
    42. Fujita, Masahisa & Ogawa, Hideaki, 1982. "Multiple equilibria and structural transition of non-monocentric urban configurations," Regional Science and Urban Economics, Elsevier, vol. 12(2), pages 161-196, May.
    43. Carlo Perroni & Kimberley A. Scharf, 2001. "Tiebout with Politics: Capital Tax Competition and Constitutional Choices," Review of Economic Studies, Oxford University Press, vol. 68(1), pages 133-154.
    44. Kanbur, Ravi & Keen, Michael, 1993. "Jeux Sans Frontieres: Tax Competition and Tax Coordination When Countries Differ in Size," American Economic Review, American Economic Association, vol. 83(4), pages 877-892, September.
    45. Jordi Jofre-Monseny, 2013. "Is agglomeration taxable?," Journal of Economic Geography, Oxford University Press, vol. 13(1), pages 177-201, January.
    46. Paul W. Rhode & Koleman S. Strumpf, 2003. "Assessing the Importance of Tiebout Sorting: Local Heterogeneity from 1850 to 1990," American Economic Review, American Economic Association, vol. 93(5), pages 1648-1677, December.
    47. A. J. Auerbach & M. Feldstein (ed.), 2002. "Handbook of Public Economics," Handbook of Public Economics, Elsevier, edition 1, volume 4, number 4.
    48. Noiset, Luc & Oakland, William, 1995. "The taxation of mobile capital by central cities," Journal of Public Economics, Elsevier, vol. 57(2), pages 297-316, June.
    49. Robert E. Lucas & Esteban Rossi-Hansberg, 2002. "On the Internal Structure of Cities," Econometrica, Econometric Society, vol. 70(4), pages 1445-1476, July.
    50. Myers, Gordon M., 1990. "Optimality, free mobility, and the regional authority in a federation," Journal of Public Economics, Elsevier, vol. 43(1), pages 107-121, October.
    51. Wildasin, David E. & Wilson, John Douglas, 1998. "Risky local tax bases: risk-pooling vs. rent-capture," Journal of Public Economics, Elsevier, vol. 69(2), pages 229-247, June.
    52. A. J. Auerbach & M. Feldstein (ed.), 2002. "Handbook of Public Economics," Handbook of Public Economics, Elsevier, edition 1, volume 3, number 3.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Brülhart, Marius & Bucovetsky, Sam & Schmidheiny, Kurt, 2015. "Taxes in Cities," Handbook of Regional and Urban Economics, in: Gilles Duranton & J. V. Henderson & William C. Strange (ed.), Handbook of Regional and Urban Economics, edition 1, volume 5, chapter 0, pages 1123-1196, Elsevier.
    2. Gaigné, Carl & Riou, Stéphane & Thisse, Jacques-François, 2016. "How to make the metropolitan area work? Neither big government, nor laissez-faire," Journal of Public Economics, Elsevier, vol. 134(C), pages 100-113.
    3. Wei Tang & Geoffrey J.D. Hewings, 2017. "Do city–county mergers in China promote local economic development?," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 25(3), pages 439-469, July.
    4. Tidiane Ly, 2018. "Sub-metropolitan tax competition with household and capital mobility," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(5), pages 1129-1169, October.
    5. ARTIGE, Lionel & CAVENAILE, Laurent & PESTIEAU, Pierre, 2014. "The macroeconomics of PAYG pension schemes in an aging society," LIDAM Discussion Papers CORE 2014033, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    6. Yuriy V. Pavlov, 2022. "Systematisation of factors behind the agglomeration effect," Journal of New Economy, Ural State University of Economics, vol. 22(4), pages 116-138, January.
    7. Fitjar, Rune Dahl, 2019. "2019/01 Merging city and suburban governments: A public choice perspective on the Norwegian local government reform," UiS Working Papers in Economics and Finance 2019/1, University of Stavanger.
    8. Kauffmann, Albrecht, 2015. "Wie lässt sich die Bevölkerungsentwicklung von Städten korrekt ermitteln? Eine Methode zur Bereinigung amtlicher Daten um die Effekte von Gebietsänderungen am Beispiel von Ostdeutschland," IWH Online 5/2015, Halle Institute for Economic Research (IWH).
    9. Yu, Huayi & Hou, Yujuan, 2021. "A tale of two districts: The impact of district consolidation on property values in Shanghai," Regional Science and Urban Economics, Elsevier, vol. 87(C).
    10. Romain Gaté, 2019. "Efficiency of road pricing schemes with endogenous workplace locations in a polycentric city," Working Papers halshs-02335766, HAL.
    11. Baumgart, Eike & Blaufus, Kay & Hechtner, Frank, 2023. "The tax treatment of commuting expenses and job-related mobility," arqus Discussion Papers in Quantitative Tax Research 280, arqus - Arbeitskreis Quantitative Steuerlehre.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Brülhart, Marius & Bucovetsky, Sam & Schmidheiny, Kurt, 2015. "Taxes in Cities," Handbook of Regional and Urban Economics, in: Gilles Duranton & J. V. Henderson & William C. Strange (ed.), Handbook of Regional and Urban Economics, edition 1, volume 5, chapter 0, pages 1123-1196, Elsevier.
    2. Tidiane Ly, 2018. "Sub-metropolitan tax competition with household and capital mobility," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(5), pages 1129-1169, October.
    3. Stef Proost & Jacques-François Thisse, 2019. "What Can Be Learned from Spatial Economics?," Journal of Economic Literature, American Economic Association, vol. 57(3), pages 575-643, September.
    4. Sandy Fréret & Denis Maguain, 2017. "The effects of agglomeration on tax competition: evidence from a two-regime spatial panel model on French data," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(6), pages 1100-1140, December.
    5. Duranton, Gilles & Puga, Diego, 2014. "The Growth of Cities," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 2, chapter 5, pages 781-853, Elsevier.
    6. Behrens, Kristian & Robert-Nicoud, Frédéric, 2015. "Agglomeration Theory with Heterogeneous Agents," Handbook of Regional and Urban Economics, in: Gilles Duranton & J. V. Henderson & William C. Strange (ed.), Handbook of Regional and Urban Economics, edition 1, volume 5, chapter 0, pages 171-245, Elsevier.
    7. Duranton, Gilles & Puga, Diego, 2015. "Urban Land Use," Handbook of Regional and Urban Economics, in: Gilles Duranton & J. V. Henderson & William C. Strange (ed.), Handbook of Regional and Urban Economics, edition 1, volume 5, chapter 0, pages 467-560, Elsevier.
    8. Holger Kächelein, 2014. "Asymmetric capital tax competition and choice of tax rate," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(1), pages 50-65, February.
    9. Albouy, David & Behrens, Kristian & Robert-Nicoud, Frédéric & Seegert, Nathan, 2019. "The optimal distribution of population across cities," Journal of Urban Economics, Elsevier, vol. 110(C), pages 102-113.
    10. Fujita, Masahisa & Thisse, Jacques-François, 2009. "New Economic Geography: An appraisal on the occasion of Paul Krugman's 2008 Nobel Prize in Economic Sciences," Regional Science and Urban Economics, Elsevier, vol. 39(2), pages 109-119, March.
    11. Thisse, Jacques-François & Proost, Stef, 2015. "Skilled Cities, Regional Disparities, and Efficient Transport: The state of the art and a research agenda," CEPR Discussion Papers 10790, C.E.P.R. Discussion Papers.
    12. Marcy Burchfield & Henry G. Overman & Diego Puga & Matthew A. Turner, 2006. "Causes of Sprawl: A Portrait from Space," The Quarterly Journal of Economics, Oxford University Press, vol. 121(2), pages 587-633.
    13. Zhang, Wenjia & Kockelman, Kara M., 2016. "Optimal policies in cities with congestion and agglomeration externalities: Congestion tolls, labor subsidies, and place-based strategies," Journal of Urban Economics, Elsevier, vol. 95(C), pages 64-86.
    14. Braid, Ralph M., 2005. "Tax competition, tax exporting and higher-government choice of tax instruments for local governments," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1789-1821, September.
    15. Sato, Yasuhiro & Thisse, Jacques-Francois, 2007. "Competing for capital when labor is heterogeneous," European Economic Review, Elsevier, vol. 51(8), pages 2054-2079, November.
    16. Thierry Madiès & Sonia Paty & Yvon Rocaboy, 2005. "Externalités fiscales horizontales et verticales. Où en est la théorie du fédéralisme financier ?," Revue d'économie politique, Dalloz, vol. 115(1), pages 17-63.
    17. Teulings, Coen N. & Ossokina, Ioulia V. & de Groot, Henri L.F., 2018. "Land use, worker heterogeneity and welfare benefits of public goods," Journal of Urban Economics, Elsevier, vol. 103(C), pages 67-82.
    18. Teulings, Coen & Ossokina, Ioulia V. & de Groot, Henri L.F., 2014. "Welfare Benefits of Agglomeration and Worker Heterogeneity," IZA Discussion Papers 8382, Institute of Labor Economics (IZA).
    19. Behrens, Kristian & Robert-Nicoud, Frédéric, 2008. "Survival of the fittest in cities: agglomeration, selection, and polarisation," LSE Research Online Documents on Economics 28506, London School of Economics and Political Science, LSE Library.
    20. Brueckner, Jan K., 2000. "A Tiebout/tax-competition model," Journal of Public Economics, Elsevier, vol. 77(2), pages 285-306, August.

    More about this item

    Keywords

    metropolitan area; fiscal competition; local labor markets; suburbanization; administrative boundary; economic boundary;
    All these keywords.

    JEL classification:

    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cor:louvco:2013065. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Alain GILLIS (email available below). General contact details of provider: https://edirc.repec.org/data/coreebe.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.