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Title:Which Communities should be afraid of mobility?: the effects of agglomeration economies on the sensitivity of firm location to local taxes PDF Logo
Authors:Jofre-Monseny, Jordi
Solé-Ollé, Albert
Issue Date:2008
Series/Report no.:CESifo working paper 2311
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.
Subjects:local taxes
agglomeration economies
local employment growth
instrumental variables
JEL:R3
H32
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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