Interjurisdictional Competition and Location Decisions of Firms

Ruben Hernandez-Murillo

No 2014-36, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We examine the welfare properties of alternative regimes of interjurisdictional competition for heterogenous mobile firms. Firms differ not only in terms of the degree of mobility across jurisdictions but also in terms of productivity. Alternative taxation regimes represent restraints on the discretionary powers of taxation of local governments. We find that average welfare is higher under discretionary and more efficient taxation regimes (in the sense of minimizing deadweight losses from distortionary taxation) when firms are highly mobile. In this situation, further limiting competition by imposing a system of non-discretionary instruments can reduce average welfare by reducing the efficiency of the local governments at raising and allocating public funds. When firms face high moving costs, on the other hand, switching to a non-discretionary and less efficient taxation regime may increase welfare by preventing local governments from engaging in excessive redistribution of resources.

Keywords: Firms location decisions; jurisdictions; tax competition. (search for similar items in EconPapers)
JEL-codes: C72 H21 H32 H73 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2014-10-01
New Economics Papers: this item is included in nep-acc, nep-bec, nep-geo and nep-pbe
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Citations: View citations in EconPapers (1)

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