IDEAS home Printed from https://ideas.repec.org/p/ieb/wpaper/doc2008-4.html
   My bibliography  Save this paper

Which communities should be afraid of mobility? The effects of agglomeration economies on the sensitivity of firm location to local taxes

Author

Listed:
  • Jordi Jofre-Monseny

    (Universitat de Barcelona & IEB)

  • Albert Solé-Ollé

    (Universitat de Barcelona, IEB & CESifo)

Abstract

This paper examines the effects of agglomeration economies (AE) on the sensitivity of firm location to tax differentials. An initial reading of the story suggests that, with AE, when a firm moves into a community attracted by a tax reduction, other firms may decide to move in as well. This suggests that AE increase the sensitivity of firm location to local taxes. However, a second version of the story reads that, if economic activities are highly concentrated in space, AE might offset any tax differential, hence suggesting a reduction in this sensitivity. This paper provides a theoretical model of intraregional firm location with Marshallian AE that is able to generate both hypotheses: AE increase (decrease) the effect of taxes when locations are (are not) of a similar size. We then use Spanish municipal data for the period 1995-2002 to test these hypotheses, analyzing the combined effect of local business taxes and Marshallian AE on the intraregional location of employment. In line with the theory, a municipality with stronger AE experiences lower (higher) tax effects if it is sufficiently dissimilar (similar) to its neighbors in terms of size.

Suggested Citation

  • Jordi Jofre-Monseny & Albert Solé-Ollé, 2008. "Which communities should be afraid of mobility? The effects of agglomeration economies on the sensitivity of firm location to local taxes," Working Papers 2008/4, Institut d'Economia de Barcelona (IEB).
  • Handle: RePEc:ieb:wpaper:doc2008-4
    as

    Download full text from publisher

    File URL: http://ieb.ub.edu/wp-content/uploads/2018/04/2008-IEB-WorkingPaper-04.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. 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.
    2. Fredrik Andersson & Rikard Forslid, 2003. "Tax Competition and Economic Geography," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(2), pages 279-303, April.
    3. Borck, Rainald & Pfluger, Michael, 2006. "Agglomeration and tax competition," European Economic Review, Elsevier, vol. 50(3), pages 647-668, April.
    4. Carlsen, Fredrik & Langset, Bjorg & Rattso, Jorn, 2005. "The relationship between firm mobility and tax level: Empirical evidence of fiscal competition between local governments," Journal of Urban Economics, Elsevier, vol. 58(2), pages 273-288, September.
    5. Eric Dubois & Matthieu Leprince & Sonia Paty, 2007. "The Effects of Politics on Local Tax Setting: Evidence from France," Urban Studies, Urban Studies Journal Limited, vol. 44(8), pages 1603-1618, July.
    6. Ellison, Glenn & Glaeser, Edward L, 1997. "Geographic Concentration in U.S. Manufacturing Industries: A Dartboard Approach," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 889-927, October.
    7. Ludema, Rodney D. & Wooton, Ian, 2000. "Economic geography and the fiscal effects of regional integration," Journal of International Economics, Elsevier, vol. 52(2), pages 331-357, December.
    8. Goolsbee, Austan & Maydew, Edward L., 2000. "Coveting thy neighbor's manufacturing: the dilemma of state income apportionment," Journal of Public Economics, Elsevier, vol. 75(1), pages 125-143, January.
    9. Hines, James R, Jr, 1996. "Altered States: Taxes and the Location of Foreign Direct Investment in America," American Economic Review, American Economic Association, vol. 86(5), pages 1076-1094, December.
    10. John Burbidge & Katherine Cuff & John Leach, 2004. "Capital Tax Competition with Heterogeneous Firms and Agglomeration Effects (new title: Tax competition with heterogeneous firms)," CESifo Working Paper Series 1277, CESifo.
    11. Devereux, Michael P. & Griffith, Rachel & Simpson, Helen, 2007. "Firm location decisions, regional grants and agglomeration externalities," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 413-435, April.
    12. Marius Brülhart & Mario Jametti & Kurt Schmidheiny, 2012. "Do agglomeration economies reduce the sensitivity of firm location to tax differentials?," Economic Journal, Royal Economic Society, vol. 122(563), pages 1069-1093, September.
    13. Jordi Jofre-Montseny & Albert Solé-Ollé, 2007. "Tax differentials and agglomeration economies in intraregional firm location," Working Papers XREAP2007-05, Xarxa de Referència en Economia Aplicada (XREAP), revised Jun 2007.
    14. Baldwin, Richard E. & Krugman, Paul, 2004. "Agglomeration, integration and tax harmonisation," European Economic Review, Elsevier, vol. 48(1), pages 1-23, February.
    15. Timothy J. Bartik, 1991. "Who Benefits from State and Local Economic Development Policies?," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number wbsle.
    16. Helen F. Ladd, 1998. "local government tax and land use policies in the united states," Books, Edward Elgar Publishing, number 1332.
    17. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
    18. Paulo Guimarães & Octávio Figueiredo & Douglas Woodward, 2007. "Measuring The Localization Of Economic Activity: A Parametric Approach," Journal of Regional Science, Wiley Blackwell, vol. 47(4), pages 753-774, October.
    19. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association;National Tax Journal, vol. 52(2), pages 269-304, June.
    20. Sylvie Charlot & Sonia Paty, 2007. "Market access effect and local tax setting: evidence from French panel data," Journal of Economic Geography, Oxford University Press, vol. 7(3), pages 247-263, May.
    21. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
    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. Jordi Jofre-Monseny, 2010. "Is agglomeration taxable?," Working Papers 2010/15, Institut d'Economia de Barcelona (IEB).
    2. Michiel Gerritse, 2010. "Policy competition and agglomeration: a local government view," Working Papers 2010/31, Institut d'Economia de Barcelona (IEB).

    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. Jordi Jofre-Monseny & Albert Solé-Ollé, 2008. "Which Communities should be afraid of Mobility? The Effects of Agglomeration Economies on the Sensitivity of Firm Location to Local Taxes," CESifo Working Paper Series 2311, CESifo.
    2. Jofre-Monseny, Jordi & Solé-Ollé, Albert, 2012. "Which communities should be afraid of mobility? The effects of agglomeration economies on the sensitivity of employment location to local taxes," Regional Science and Urban Economics, Elsevier, vol. 42(1-2), pages 257-268.
    3. 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.
    4. Karen Crabbé & Karolien De Bruyne, 2013. "Taxes, Agglomeration Rents and Location Decisions of Firms," De Economist, Springer, vol. 161(4), pages 421-446, December.
    5. Marius Brülhart & Helen Simpson, 2018. "Agglomeration economies, taxable rents and government capture: evidence from a place-based policy," Journal of Economic Geography, Oxford University Press, vol. 18(2), pages 319-353.
    6. Marius Brülhart & Mario Jametti & Kurt Schmidheiny, 2012. "Do agglomeration economies reduce the sensitivity of firm location to tax differentials?," Economic Journal, Royal Economic Society, vol. 122(563), pages 1069-1093, September.
    7. Jordi Jofre-Monseny, 2010. "Is agglomeration taxable?," Working Papers 2010/15, Institut d'Economia de Barcelona (IEB).
    8. Koh, Hyun-Ju & Riedel, Nadine & Böhm, Tobias, 2013. "Do governments tax agglomeration rents?," Journal of Urban Economics, Elsevier, vol. 75(C), pages 92-106.
    9. Jordi Jofre-Monseny, 2010. "Is agglomeration taxable?," Working Papers 2010/15, Institut d'Economia de Barcelona (IEB).
    10. 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.
    11. Eva Luthi & Kurt Schmidheiny, 2014. "The effect of agglomeration size on local taxes," Journal of Economic Geography, Oxford University Press, vol. 14(2), pages 265-287.
    12. Michiel Gerritse, 2010. "Policy competition and agglomeration: a local government view," Working Papers 2010/31, Institut d'Economia de Barcelona (IEB).
    13. Rainald Borck & Hyun‐Ju Koh & Michael Pflüger, 2012. "Inefficient Lock‐In And Subsidy Competition," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(4), pages 1179-1204, November.
    14. Michiel Gerritse, 2010. "Policy competition and agglomeration: a local government view," Working Papers 2010/31, Institut d'Economia de Barcelona (IEB).
    15. Kato, Hayato, 2015. "The importance of government commitment in attracting firms: A dynamic analysis of tax competition in an agglomeration economy," European Economic Review, Elsevier, vol. 74(C), pages 57-78.
    16. Becker, Sascha O. & Egger, Peter H. & Merlo, Valeria, 2012. "How low business tax rates attract MNE activity: Municipality-level evidence from Germany," Journal of Public Economics, Elsevier, vol. 96(9-10), pages 698-711.
    17. Koh, Hyun-Ju & Riedel, Nadine & Böhm, Tobias, 2013. "Do governments tax agglomeration rents?," Journal of Urban Economics, Elsevier, vol. 75(C), pages 92-106.
    18. Hyun-Ju Koh & Nadine Riedel, 2010. "Do governments tax agglomeration rents?," Working Papers 2010/21, Institut d'Economia de Barcelona (IEB).
    19. Pasquale Commendatore & Ingrid Kubin, 2016. "Source versus residence: A comparison from a new economic geography perspective," Papers in Regional Science, Wiley Blackwell, vol. 95(2), pages 201-222, June.
    20. Chen, Yang & Regis, Paulo José, 2014. "Strategic interactions in corporate tax between Chinese local governments," RIEI Working Papers 2014-01, Xi'an Jiaotong-Liverpool University, Research Institute for Economic Integration, revised 27 Oct 2015.

    More about this item

    Keywords

    Local taxes; agglomeration economies; local employment growth; instrumental variables.;
    All these keywords.

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:ieb:wpaper:doc2008-4. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/iebubes.html .

    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: (email available below). General contact details of provider: https://edirc.repec.org/data/iebubes.html .

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.