Which Communities Should Be Afraid of Mobility? The Effects of Agglomeration Economies on the Sensitivity of Firm Location to Local Taxes

39 Pages Posted: 2 Jun 2008

See all articles by Jordi Jofre-Monseny

Jordi Jofre-Monseny

University of Barcelona - Department of Political Economics

Albert Sole-Olle

University of Barcelona; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: May 2008

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.

Keywords: local taxes, agglomeration economies, local employment growth, instrumental variables

JEL Classification: R3, H32

Suggested Citation

Jofre-Monseny, Jordi and Sole-Olle, Albert, Which Communities Should Be Afraid of Mobility? The Effects of Agglomeration Economies on the Sensitivity of Firm Location to Local Taxes (May 2008). CESifo Working Paper Series No. 2311. Available at SSRN: https://ssrn.com/abstract=1139788

Jordi Jofre-Monseny

University of Barcelona - Department of Political Economics ( email )

Av. Diagonal, 690
Barcelona, 08034
Spain

Albert Sole-Olle (Contact Author)

University of Barcelona ( email )

Gran Via de les Corts Catalanes, 585
Barcelona, 08007
Spain

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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