Urban costs, Trade costs and Tax Competition

Fabien Candau ()

Revue d'économie politique, 2008, vol. 118, issue 5, 625-661

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 a reduction in trade costs and/or an increase in urban costs 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. Lastly two extensions are done in order to show that i) even under a partial agglomeration of activities, the race to the bottom in terms of taxation is still verified ii) even in a multi-regions model, international trade liberalization generates a race to the bottom when regional trade costs are low enough.

Keywords: economic geography; agglomeration; trade; race to the bottom (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (13)

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