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Urban costs, Trade costs and Tax Competition

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  • Fabien Candau

Abstract

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.

Suggested Citation

  • Fabien Candau, 2008. "Urban costs, Trade costs and Tax Competition," Revue d'économie politique, Dalloz, vol. 118(5), pages 625-661.
  • Handle: RePEc:cai:repdal:redp_185_0625
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    Cited by:

    1. Fabien Candau, 2011. "Is Agglomeration Desirable?," Annals of Economics and Statistics, GENES, issue 101-102, pages 203-227.
    2. Fabien Candau & Michaël Goujon & Jean-François Hoarau & Serge Rey, 2014. "Real exchange rate and competitiveness of an EU's ultra-peripheral region: La Reunion Island," International Economics, CEPII research center, issue 137, pages 1-21.
    3. Fabien Candau & Jacques Le Cacheux, 2017. "Corporate Income Tax as a Genuine own Resource," Working Papers hal-01847937, HAL.
    4. Anne MUSSON, 2012. "The importance of the stakeholders’ involvement in building indicators. The case of environmental regulation in France," Working Papers 2011-2012_8, CATT - UPPA - Université de Pau et des Pays de l'Adour, revised Apr 2014.
    5. Fabien Candau, 2011. "Is Agglomeration Desirable?," Annals of Economics and Statistics, GENES, issue 101-102, pages 203-227.

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