The paradigm of locational competition
AbstractLocational competition is geographic competition, competition between places, between cities, between regions, and between countries. These spatial units compete with each other for the mobile production factors in factor markets, i.e., for mobile capital, for mobile technical know-how, and for mobile highly qualified labor. Countries compete with their taxes, their infrastructure and their institutional setups. Mobile capital can leave a country when conditions there become unfavorable, for example, when taxes are raised. Taxation drives capital out of the country, whereas infrastructure attracts capital. Obviously, there is a trade-off between these two effects. In addition to tax competition and competition in providing public goods (infrastructure competition), there is also competition between institutional rules, i.e., between product standards, permitting procedures, or other legal regulations (institutional competition). The exit option of capital redefines the opportunity costs of taking economic policy measures and thus also redefines policymakers' cost-benefit calculus. Policymakers' decision-making scope is reduced because the tax base in a country shrinks when real capital emigrates. In addition, when real capital emigrates, labor productivity drops, which reduces income and job opportunities and diminishes the tax base. Locational competition impacts heavily on the position of unions because expansionary wage policies, i.e., increases in wage rates that go beyond employment-neutral productivity increases, cause capital to emigrate. This amplifies the effect of such policies on employment. As a result unions' power wanes, which can be seen in the drop in membership. The fear that there will be an unlimited race to the bottom is unfounded. There are numerous ways, even given international competition, of ensuring that infrastructure is provided without causing capital to emigrate. The discussion about the race to the bottom has obscured the fact that locational competition, like product competition, is a discovery process in the sense of Hayek, a means of reducing costs and finding new solutions. This is why the institutional competition in the EU, which was brought about by the Cassis de Dijon verdict of the European Court of Justice when establishing the country-of-origin ruling, has become a national regulations can opener. Locational competition puts interest groups under pressure, thus constraining rentseeking. It also tames governments. Locational competition will have its impact on national economic policies. Governments will be forced to look at international benchmarks for their own policies. This holds for stabilization policy, for tax policy, for infrastructure policy, and it also begins to apply to social policy. Economic policies undertaken by the major European governments can be explained with the concept of locational competition. --
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Kiel Institute for the World Economy (IfW) in its series Kiel Discussion Papers with number 367.
Date of creation: 2000
Date of revision:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Sinn, Hans-Werner, 1990.
"Tax harmonization and tax competition in Europe,"
European Economic Review,
Elsevier, vol. 34(2-3), pages 489-504, May.
- Oates, Wallace E. & Schwab, Robert M., 1988. "Economic competition among jurisdictions: efficiency enhancing or distortion inducing?," Journal of Public Economics, Elsevier, vol. 35(3), pages 333-354, April.
- Feldstein, Martin & Horioka, Charles, 1980.
"Domestic Saving and International Capital Flows,"
Royal Economic Society, vol. 90(358), pages 314-29, June.
- Henderson, J Vernon, 1985. "The Tiebout Model: Bring Back the Entrepreneurs," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 248-64, April.
- Sinn, Hans-Werner, 1997. "The selection principle and market failure in systems competition," Journal of Public Economics, Elsevier, vol. 66(2), pages 247-274, November.
- Jeremy Edwards & Michael Keen, 1994.
"Tax competition and Leviathon,"
IFS Working Papers
W94/07, Institute for Fiscal Studies.
- Martin Feldstein, 1997.
"Tax Policy and International Capital Flows,"
NBER Working Papers
4851, National Bureau of Economic Research, Inc.
- Martin Feldstein, 1994. "Tax policy and international capital flows," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 130(4), pages 675-697, December.
- Siebert, Horst & Koop, Michael J., 1993. "Institutional competition versus centralization: Quo vadis Europe?," Kiel Working Papers 548, Kiel Institute for the World Economy.
- Lorz, Jens Oliver, 1996.
"Capital mobility, tax competition, and lobbying for redistributive capital taxation,"
Kiel Working Papers
779, Kiel Institute for the World Economy.
- Lorz, Oliver, 1998. "Capital mobility, tax competition, and lobbying for redistributive capital taxation," European Journal of Political Economy, Elsevier, vol. 14(2), pages 265-279, May.
- Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, January.
- Lorz, Jens Oliver & Stähler, Frank, 1997. "Who is afraid of capital mobility? On labor taxation and the level of public services in an open economy," Kiel Working Papers 824, Kiel Institute for the World Economy.
- Zodrow, George R. & Mieszkowski, Peter, 1986. "Pigou, Tiebout, property taxation, and the underprovision of local public goods," Journal of Urban Economics, Elsevier, vol. 19(3), pages 356-370, May.
- Edel, Matthew & Sclar, Elliott, 1974. "Taxes, Spending, and Property Values: Supply Adjustment in a Tiebout-Oates Model," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 941-54, Sept./Oct.
- Long, Ngo Van & Siebert, Horst, 1989. "Institutional competition versus ex-ante harmonization: the case of environmental policy," Kiel Working Papers 396, Kiel Institute for the World Economy.
- Siebert, Horst & Koop, Michael J, 1993. "Institutional Competition versus Centralization: Quo Vadis Europe?," Oxford Review of Economic Policy, Oxford University Press, vol. 9(1), pages 15-30, Spring.
- Oates, Wallace E, 1969. "The Effects of Property Taxes and Local Public Spending on Property Values: An Empirical Study of Tax Capitalization and the Tiebout Hypothesis," Journal of Political Economy, University of Chicago Press, vol. 77(6), pages 957-71, Nov./Dec..
- Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416.
- Bucovetsky, Sam & Wilson, John Douglas, 1991. "Tax competition with two tax instruments," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 333-350, November.
- Sichelschmidt, Henning, 2001. "Das Projekt eines deutschen Tiefwasser-Containerhafens und seine Rolle im Standortwettbewerb," Open Access Publications from Kiel Institute for the World Economy 2610, Kiel Institute for the World Economy (IfW).
- Ramon Tremosa-i-Balcells & Joan Costa-i-Font, . "The "relative competitiveness" patterns of Spanish regions after the European Monetary Union (1999-2002)," Studies on the Spanish Economy 169, FEDEA.
- Balz R. Bodenmann, 2011. "Modelling firm (re-)location choice in UrbanSim," ERSA conference papers ersa11p1091, European Regional Science Association.
- Berthold, Norbert & Fricke, Holger & Kullas, Matthias, 2005. "Standortwettbewerb der Bundesländer," Wirtschaftswissenschaftliche BeitrÃ¤ge 80, Julius-Maximilians-Universität Würzburg, Lehrstuhl für Volkswirtschaftslehre, insbes. Wirtschaftsordnung und Sozialpolitik.
- Berthold, Norbert & Fricke, Holger, 2009. "Die Bundesländer im Standortwettbewerb," Wirtschaftswissenschaftliche BeitrÃ¤ge 106, Julius-Maximilians-Universität Würzburg, Lehrstuhl für Volkswirtschaftslehre, insbes. Wirtschaftsordnung und Sozialpolitik.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics).
If references are entirely missing, you can add them using this form.