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Urban costs, Trade costs and Tax Competition

  • Fabien Candau

This paper presents a model of the New Economic Geography which integrates commuting costs and land rent and displays a dispersion ? agglomeration configuration when regional and/or international trade are liberalised. Two main results are found, the first one is that dispersion Pareto dominates agglomeration, the second one is that the agglomeration rent is not bell-shaped but strictly decreasing when impediments to trade are removed. This turns out to be a convenient framework to revisit the links between tax competition, location of firms and trade integration. It is shown in particular that a reduction in trade costs and/or an increase in urban costs leads to a race to the bottom in terms of taxation, and that a tax floor set at the level of the small country may be detrimental to it. Lastly two extensions are done in order to show that i) even under a partial agglomeration of activities, the race to the bottom in terms of taxation is still verified ii) even in a multi-regions model, international trade liberalization generates a race to the bottom when regional trade costs are low enough.

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Article provided by Dalloz in its journal Revue d'économie politique.

Volume (Year): 118 (2008)
Issue (Month): 5 ()
Pages: 625-661

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Handle: RePEc:cai:repdal:redp_185_0625
Contact details of provider: Web page: http://www.cairn.info/revue-d-economie-politique.htm

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