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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
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    References listed on IDEAS

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    Cited by:

    1. Hansjörg Blöchliger & José Maria Pinero Campos, 2011. "Tax Competition Between Sub-Central Governments," OECD Economics Department Working Papers 872, OECD Publishing.
    2. Jordi Jofre-Monseny, 2010. "Is agglomeration taxable?," Working Papers 2010/15, Institut d'Economia de Barcelona (IEB).
    3. Michiel Gerritse, 2010. "Policy competition and agglomeration: a local government view," Working Papers 2010/31, Institut d'Economia de Barcelona (IEB).
    4. Michiel Gerritse, 2010. "Policy competition and agglomeration: a local government view," Working Papers 2010/31, Institut d'Economia de Barcelona (IEB).

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    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

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