Scandinavian Working Papers in Economics

Discussion Paper Series in Economics,
Norwegian School of Economics, Department of Economics

No 15/2010: Agglomeration, tax competition and local public goods supply.

Eva Benedicte Danielsen Norman () and Victor Danielsen Norman ()
Additional contact information
Eva Benedicte Danielsen Norman: Samfunns- og Næringslivsforskning, Postal: SNF, Breiviksveien 40, N-5045 Bergen, Norway
Victor Danielsen Norman: Dept. of Economics, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Economics, Helleveien 30, N-5045 Bergen, Norway

Abstract: In this paper we develop a framework for studying tax competition and local public goods supply in a setting where real and fiscal externalities interact with local democracy. We use the framework (a) to analyse if there is any reason to believe that local autonomy generally will give a tax race to the bottom (there is not), and (b) to look more closely at possible sources of oversupply or undersupply of publicly provided goods in a setting where local democracies compete for people. We identify two potential sources – the relationship between individual mobility and willingness to pay for publicly provided goods, and the mobility distribution of individuals (i.e. the distribution of individuals over residential preferences). The two could reinforce each other in a local democracy if the majority of the residents in a community are relatively mobile (the “American” case), while they would pull in opposite directions if the majority of residents are relatively immobile (the “European” case).

Keywords: Tax competition; local public goods; agglomeration; migration; regional economic policy

JEL-codes: F12; H21; H73; J61

22 pages, August 17, 2010

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