Competing for firms under agglomeration: Policy timing and welfare

Abstract

This article studies government tax competition for firms under agglomeration effects. Agglomeration forces avert races to the bottom. They also eliminate the need to harmonize policy if large regions set policy first. However, if regions set policy at the same time, harmonization can still improve welfare. The case against harmonization thus rests on the assumed timing of policy-formation, not on agglomeration itself. Tax floors, an often advocated alternative to harmonization may not form Pareto-improvements: that depend on the effects of local policy outside the own region.