Agglomeration effect and tax competition in the metropolitan area

Abstract

This paper analyzes tax competition between a central city and a suburban city in a metropolitan area allowing migration. We compare the local government’s tax policies both in the closed economy and in the open economy. Then, we investigate how the agglomeration effects influence the migration in equilibrium and examine the centripetal forces and the centrifugal forces in the metropolitan area. We also investigate the efficiency of the market equilibrium. It is found that each government has a dominant strategy in determining tax rate in a closed economy. The population distribution depends on the housing lot’s and public good’s elasticity of utility in an open economy. The tax rates of both cities depend on the marginal productivity of the public good in the central city. It is shown that less concentration on the central city occurs in the equilibrium.