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Investment in public infrastructure with spillovers and tax competition between contiguous regions

  • Dembour, Carole
  • Wauthy, Xavier

Two contiguous regions compete to attract a population of heterogeneous firms. They choose infrastructure levels in a first stage and compete in taxes in a second stage. We study the properties of Subgame Perfect Nash equilibria in this stage game depending on the extent to which the benefits of infrastructure spill over from one region to the other. First, we show that the presence of inter-regional spillovers allows jurisdictions to control for the intensity of tax competition and therefore affects the optimal levels of infrastructure selected at equilibrium. Second, by comparing the non-cooperative and cooperative outcomes, we show that the extent to which regions overinvest in infrastructures negatively depends on the intensity of the spillovers.

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Article provided by Elsevier in its journal Regional Science and Urban Economics.

Volume (Year): 39 (2009)
Issue (Month): 6 (November)
Pages: 679-687

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Handle: RePEc:eee:regeco:v:39:y:2009:i:6:p:679-687
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  1. Wilson, John Douglas & Wildasin, David E., 2004. "Capital tax competition: bane or boon," Journal of Public Economics, Elsevier, vol. 88(6), pages 1065-1091, June.
  2. JUSTMAN, Moshe & THISSE, Jacques-François & VAN YPERSELE, Tanguy, . "Taking the bite out of fiscal competition," CORE Discussion Papers RP -1598, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. De Borger Bruno & Dunkerley Fay & Proost Stef, 2006. "Strategic investment and pricing decisions in a congested transport corridor," Energy, Transport and Environment Working Papers Series ete0602, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Energy, Transport and Environment.
  4. Myrna Wooders & Ben Zissimos, 2003. "Hotelling Tax Competition," CESifo Working Paper Series 932, CESifo Group Munich.
  5. Jeremy Edwards & Michael Keen, 1994. "Tax competition and Leviathon," IFS Working Papers W94/07, Institute for Fiscal Studies.
  6. Haufler, Andreas & Wooton, Ian, 2006. "The effects of regional tax and subsidy coordination on foreign direct investment," European Economic Review, Elsevier, vol. 50(2), pages 285-305, February.
  7. Ben Zissimos & Myrna H. Wooders, 2006. "Relaxing Tax Competition through Public Good Differentiation," Vanderbilt University Department of Economics Working Papers 0601, Vanderbilt University Department of Economics.
  8. Head, C. Keith & Ries, John C. & Swenson, Deborah L., 1999. "Attracting foreign manufacturing: Investment promotion and agglomeration," Regional Science and Urban Economics, Elsevier, vol. 29(2), pages 197-218, March.
  9. De Borger, B. & Proost, S. & Van Dender, K., 2005. "Congestion and tax competition in a parallel network," European Economic Review, Elsevier, vol. 49(8), pages 2013-2040, November.
  10. JUSTMAN, M. & THISSE, J.-F. & van YPERSELE, T., 2001. "Fiscal competition and regional differentiation," CORE Discussion Papers 2001024, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  11. C. Dembour, 2008. "Competition for Business Location: A Survey," Journal of Industry, Competition and Trade, Springer, vol. 8(2), pages 89-111, June.
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