Taxes, Agglomeration Rents and Location Decisions of Firms

Posted: 13 Feb 2011

See all articles by Karen Crabbe

Karen Crabbe

KU Leuven - Department of Economics

Karolien De Bruyne

KU Leuven - Center for Economic Studies

Multiple version iconThere are 2 versions of this paper

Date Written: October 2010

Abstract

The goal of this paper is to analyse the impact of interactions between tax rates and agglomeration rents on location decisions of firms within Belgium. In the theoretical literature it is argued that both location determinants may weaken each other’s impact. Using the number of new firms at the sector level for 43 Belgian districts, we show that local effective tax rates either have no or a negative impact on location decisions. Moreover, both types of agglomeration rents in a district are important for location decisions. The presence of firms in a district attracts new firms, while the presence of firms in the same sector deters firm entry due to competition. However, the interaction effect between taxes and agglomeration rents on firm entry is significant. We show that a higher effective tax rate in a district weakens the positive impact of the agglomeration rents on location decisions of firms.

JEL Classification: H71, F21, R30

Suggested Citation

Crabbe, Karen and De Bruyne, Karolien, Taxes, Agglomeration Rents and Location Decisions of Firms (October 2010). Available at SSRN: https://ssrn.com/abstract=1759324 or http://dx.doi.org/10.2139/ssrn.1759324

Karen Crabbe (Contact Author)

KU Leuven - Department of Economics ( email )

Leuven, B-3000
Belgium

Karolien De Bruyne

KU Leuven - Center for Economic Studies ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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