playing a game with some other community, C, in which communities B and C are both competing to attract their first firm in order to start themselves on the road to establishing agglomeration economies within their communities. These examples, simple as they are, capture important aspects of why communities engage in tax competition. Because of agglomeration economies, a relatively small tax subsidy to the first firm to locate in a particular community may result in many other firms choosing the same community, even if no subsidies (or only small subsidies) are offered to later firms. Thus communities have an incentive to subsidize early firms to locate within their borders in the hope of establishing agglomeration economies which will attract later firms. These effects were captured in the first and second scenarios just discussed and they showed that tax competition may either enhance or reduce efficiency. However, in the third scenario, tax competition prevents agglomeration economies from ever developing because competing communities that have few firms offer tax subsidies to attract their first firms. The resulting competition causes firms to spread out over multiple locations, even though they would all be better off if they concentrated in a few locations. Thus tax competition may prevent agglomeration economies from ever developing.
Fujita, M. and H. Ogawa ( 1982), "Multiple equilibria and structural transition of nonmonocentric urban configurations", Regional Science and Urban Economics, 12, 161-96.
Mills, E. S. ( 1972), Studies in the Structure of the Urban Economy, Baltimore, Maryland: Johns Hopkins University Press.
White, M. J. ( 1988), Urban commuting is not "wasteful, Journal of Political Economy, 96, 1097-1110.
White, M. J. ( 1996), "Urban areas with decentralized employment: theory and empirical work", in Paul Cheshire and Edwin S. Mills (eds), Handbook of Applied Urban Economics, Amsterdam: North-Holland.
Wieand, K. ( 1987), "An extension of the monocentric urban spatial equilibrium model to a multi-center setting: the case of the two-center city", Journal of Urban Economics, 21, 259-71.