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

Jordi Jofre-Monseny () and Albert Solé-Ollé ()
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Jordi Jofre-Monseny: Universitat de Barcelona & IEB
Albert Solé-Ollé: Universitat de Barcelona, IEB & CESifo

No 2008/4, Working Papers from Institut d'Economia de Barcelona (IEB)

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. (search for similar items in EconPapers)
JEL-codes: H32 R3 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2008
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Citations: View citations in EconPapers (4)

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