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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractWe analyze productivity enhancing public expenditure in a spatial economic model with labor mobility, firm-specific increasing returns to scale, and transport costs.Building on Krugman (1991), Fujita, Krugman and Venables (1999) and Redding (2016), we compare optimal investment and tax policies of fiscally autonomous regions to those of a benevolent central planer. We find transport costs and the size of scale effects to influence optimal tax and spending rates under both regimes. For sufficiently low transport costs and low substitutability between manufactured goods, regional fiscal autonomy leads to underinvestment: The lower the transport costs, the lower the local investment, and the higher the potential welfare gain through centralized policies. Our results challenge the view that local public goods should be financed entirely by local governments. They also help explain the recent decline of public investment at the municipal level in fiscally decentralized countries like Germany.

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How important are market potential and fiscal incentives for firms’ location decisions? We estimate the influence of subsidies and tax breaks on the decisions of firms to relocate or to remain in a certain U.S. county using a structural economic geography model developed in Meurers and Moenius (2018). In a panel data set from 1990 to 2016 for almost 3,000 U.S. counties, the authors find a strong and robust impact of economic geography on firms’ location decisions: The closer a county is to market demand and to the supply of inputs, the more firms locate there. As the model predicts, public investment attracts firms while the local tax burden disincentivizes economic activity, although to a lesser extent. Furthermore, in counties that are closer to economic centers, firms respond less to public investment and tax changes than firms in counties far away from centers. These data, therefore, confirm the predictions of the model regarding the potential effectiveness of regional development policies, in particular for investment tax credits, job creation, and training.

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