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Do agglomeration economies reduce the sensitivity of firm location to tax differentials?

Authors


  • Correspondence regarding this article may be sent to: Marius Brülhart, Département d’économétrie et économie politique, Ecole des HEC, Université de Lausanne, 1015 Lausanne, Switzerland, email: Marius.Brulhart@unil.ch; Mario Jametti, Mecop Institute, University of Lugano, Via G. Buffi 13, 6900 Lugano, Switzerland, email: mario.jametti@usi.ch; Kurt Schmidheiny, Universität Basel, Wirtschaftswissenschaftliche Fakultät, Peter Merian-Weg 6, 4002 Basel, Switzerland, email: kurt.schmidheiny@unibas.ch

  • We thank Jörn-Steffen Pischke (the editor) for very helpful comments. We have also benefited from suggestions by Richard Baldwin, Antonio Ciccone, Gilles Duranton, Diego Puga, Helen Simpson, Albert Solé-Ollé, Dan Trefler, Federico Trionfetti, Jean-François Wen and seminar participants at the Universities of Barcelona, Dijon, Geneva (Graduate Institute of International Studies), IFS, KU Leuven, the London School of Economics, Madrid (Complutense), Nottingham, Pompeu Fabra, St. Gallen, Strathclyde, Toronto, Vienna (IHS), Warwick (IIPF) and York. Jean-François Fracheboud and Andrea Grossi at the Swiss Federal Statistical Office have generously facilitated our access to the data. Financial support from the Swiss National Science Foundation (grants CRSI11-130648, PBLA1-106054, PA001-105026 and NCCR Trade Regulation), from the EU's Sixth Framework Programme (‘Micro-Dyn’ project), from the Social Sciences and Humanities Research Council of Canada, from the Spanish Ministry of Science and Innovation (Ramon y Cajal and Consolider SEJ2007-64340) and the Barcelona GSE Research Network is gratefully acknowledged.

Abstract

Recent theoretical work in economic geography has shown that agglomeration forces can mitigate ‘race-to-the-bottom’ tax competition, by partly or fully offsetting firms’ sensitivity to tax differentials. We test this proposition using data on firm births across Swiss municipalities. We find that corporate taxes deter firm births less in more spatially concentrated sectors. Firms in sectors with an agglomeration intensity in the top quintile are less than half as responsive to differences in corporate tax burdens as firms in sectors with an agglomeration intensity in the bottom quintile. Hence, agglomeration economies do appear to attenuate the impact of tax differentials on firms’ location choices.

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