Lumpy World and Race to the Bottom

Abstract: This paper presents a model of the New Economic Geography which integrates commuting costs and land rent and displays a dispersion - agglomeration configuration when regional and/or international trade are liberalised. Two main results are found, the first one is that dispersion Pareto dominates agglomeration, the second one is that the agglomeration rent is not bell-shaped but strictly decreasing when impediments to trade are removed. This turns out to be a convenient framework to revisit the links between tax competition, location of firms and trade integration. It is shown in particular that trade liberalization only leads to a race to the bottom in terms of taxation, and that a tax floor set at the level of the small country may be detrimental to it.

Keywords: Economic geography; Cities; Trade; Tax competition. (search for similar items in EconPapers)
JEL-codes: F1 F2 (search for similar items in EconPapers)
Date: 2005-08-17
Note: Type of Document - pdf; pages: 24
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